NATIONAL TAX

(2023 EDITION )

TAXING AUTHORITY

1. JURISDICTION, POWER, AND FUNCTIONS OF THE COMMISSIONER OF TYPES OF PHILIPPINE INCOME TAXES
INTERNAL REVENUE

1. Powers and Duties of the Bureau of Internal Revenue (BIR) (Sec. 2, NIRC)
1. Graduated income tax and fixed tax on gross sales or receipts for
1. To assess and collect all national internal revenue taxes, fees, and charges;
individuals;
2. To enforce all forfeitures, penalties, and fines connected therewith;
3. To execute judgment in all cases decided in its favor by the CTA and the
ordinary courts; and 2. Normal corporate income tax on corporations;
4. To give effect to and administer the supervisory and police powers conferred
upon it by the Tax Code or other special laws. 3. Minimum corporate income tax on corporations;

2. Power of the Commissioner to Interpret Tax Laws and to Decide Tax Cases 4. Special income tax on certain corporations;
Power to Interpret (Quasi-Legislative Power)
5. Capital gains tax on sale or exchange of unlisted shares of stock of a
The power to interpret provisions of the NIRC and other tax laws shall be under the exclusive domestic corporation classified as capital assets;
and original jurisdiction of theCIR, subject to review by the Secretary of Finance(Sec. 4,
NIRC).
6. Capital gains tax on sale or exchange of real property located in the
A ruling by the CIR that interprets provisions of the NIRC and other tax laws shall be presumed
Philippines classified as a capital asset;
valid unless modified, reversed, or superseded by the Secretary of Finance. A taxpayer who
receives an adverse ruling from the CIR may, within 30 days from the date of receipt of such
ruling, seek its review by the Secretary of Finance. The Secretary of Finance may also review 7. Final withholding tax on certain passive investment income paid to
the rulings motu proprio. Subject to the exclusive appellate jurisdiction of the CTA. residents;

Taxpayers acting in good faith should not be made to suffer for adhering to general 8. Final withholding tax on income payments made to non-residents;
interpretative rules of the Commissioner interpreting tax laws, should such interpretation later
turn out to be erroneous and be reversed by the Commissioner or this Court. Indeed, Section 9. Fringe benefits tax on fringe benefits of supervisory or managerial
246 of the Tax Code expressly provides that a reversal of a BIR regulation or ruling cannot employees;
adversely prejudice a taxpayer who in good faith relied on the BIR regulation or ruling prior to
its reversal(CIR v. San Roque, G.R. No. 187485 (2013)) 10. Branch profit remittance tax; and
Power to Decide Tax Cases(Quasi-Judicial Power)- The power to decide (1) disputed
11. Tax on improperly accumulated earnings of corporations
assessments, (2) refunds of internal revenue taxes, fees, charges and penalties, or (3) other
matters arising under the NIRC or other laws administered by the BIR is vested in the CIR,
subject to the exclusive appellate jurisdiction of the CTA(Sec. 4, NIRC).

3. Authority of the Commissioner to Delegate Power

GR: The Commissioner may delegate he powers vested in him, subject to limitations and
restrictions as may be imposed under rules and regulations to be promulgated by the SOF, upon
recommendation of the Commissioner. TAXABLE PERIOD
XPN: The following powers of the Commissioner shall not be delegated:
Taxable year- means the calendar year, or the fiscal year ending during such calendar
1. The power to recommend the promulgation of rules and regulations by the SOF;
year, upon the basis of which the net income is computed. Taxable year includes, in the
2. The power to issue rulings of first impression to reverse, revoke, or modify any
existing ruling of the Bureau; case of return made for a fractional part of a year under the provisions of Title II (Tax on
3. The power to compromise or abate any tax liability; Income), the period for which such return is made (Sec. 22 (P), NIRC).
4. The power to assign or reassign internal revenue officers to establishment where
articles subject to excise tax are produced or kept. 1. Calendar Year – An accounting period of 12 months ending on the last
day of December.
4. Non-retroactivity of rulings (Sec. 246, NIRC)
2. Fiscal Year – An accounting period of 12 months ending on the last day
GR: Any revocation, modification, or reversal of (1) rules and regulations promulgated in of any month other than December(Sec. 22(Q), NIRC).
accordance with the NIRC, or (2) any rulings or circulars promulgated by the CIR shall NOT be
given retroactive application if the revocation, modification, or reversal is prejudicial to the
taxpayers. 3. Short Period – An accounting period which starts after the first month of
XPNs:
the tax year or ends before the last month of the tax year (less than 12
1. Where the taxpayer deliberately misstates or omits material facts from his return months). Instances whereby short accounting period arises:
or any document required of him by the BIR; a. When a corporation is newly organized.
2. Where the facts subsequently gathered by the BIR are materially different from b. When a corporation is dissolved. (Sec. 52(c), NIRC)
the facts on which the ruling is based; or c. When a corporation changes its accounting period. (Sec 46,
3. Where the taxpayer acted in bad faith. NIRC)
d. When the taxpayer dies.
Under Sec. 246, taxpayers may rely upon a rule or ruling issued by the CIR from the time the
rule or ruling is issued up to its reversal by the CIR or this Court. The reversal is not given
retroactive effect. There must, however, be a rule or ruling issued by the Commissioner that is
relied upon by the taxpayer in good faith. A mere administrative practice, not formalized into a GR: Taxable income shall be computed based on the taxpayer‘s annual accounting
rule or ruling, will not suffice because such a mere administrative practice may not be uniformly
period, which may be fiscal year or calendar year
and consistently applied.
XPN: Taxable income shall be computed based on the basis of calendar year only:
2. RULE-MAKING AUTHORITY OF THE SECRETARY OF FINANCE
1. If the taxpayer's annual accounting periodis other than a fiscal year;
2. If the taxpayer has no annual accountingperiod;
Authority of the Secretary of Finance to Promulgate Rules and Regulations(Sec. 244, 3. If the taxpayer does not keep books ofaccounts; or
NIRC) 4. If the taxpayer is an individual(Sec. 43, NIRC)

The Secretary of Finance, upon recommendation of the CIR, shall promulgate all needful rules
and regulations for effective enforcement of the provisions of the Code.

BAR: Can the Commissioner of Internal Revenue inquire into the bank deposits of a taxpayer?
If so, does this power of the Commissioner conflict with R.A.1405 (Secrecy of Bank Deposits
Law). (1998 BAR)
A: The Commissioner of Internal Revenue is authorized to inquire into the bank deposits of: 1.
Any taxpayer upon his written consent; 2. A decedent to determine his gross estate; 3. Any
taxpayer who has filed an application for compromise of his tax liability by means of financial
incapacity to pay his tax liability; 4. A specific taxpayer or taxpayers subject of a request for the
supply of tax information from a foreign tax authority pursuant to an international convention or
agreement on tax matters to which the Philippines is a signatory. (Sec. 6(F), NIRC) The limited
power of the Commissioner does not conflict with R.A. No. 1405 because the provisions of the
Tax Code granting this power is an exception to the Secrecy of Bank Deposits Law as
embodied in a later legislation. Furthermore, in case a taxpayer applies for an application to
compromise the payment of his tax liabilities on his claim that his financial position
demonstrates a clear inability to pay the tax assessed, his application shall not be considered
unless and until he waives in writing his privilege under R.A. No. 1405, and such waiver shall
constitute the authority of the Commissioner to inquire into the bank deposits of the taxpayer.

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 INCOME TAX

GENERAL PRINCIPLES SITUS OF INCOME

a direct tax on all yearly profits arising from property, professions, trades or officers or a
tax on a person's income, emoluments, profits, and the like. It is: • 1. National; • 2. Direct;
3. Excise; and • 4. General. • ( Fisher vs. Trinidad, G.R. No. L-17518, Oct. 20, 2022) INCOME SITUS

Nature Residence of the debtor

Income tax is generally classified as an excise tax. It is NOT levied upon persons, property, Interest
funds or profits but upon the right of a person to receive income or profits. DOMESTIC BANK with Branch overseas?
It is the physical location of the bank that determines whether the
interest income is an income from within or without the
INCOME TAX SYSTEM Philippines.
Thus, if the deposit is maintained in the Singapore Branch of the
BPI, the interest earned is an income from WITHOUT.
i. GLOBAL
Residence of the corporation declaring the dividends.
Under a global tax system, it does not matter whether the income received by the Dividends
taxpayer is classified as compensation income, business, or professional income, 4BLUE 95NOTE: Foreign Corporation
passive investment income, capital gain, or other income. All items of gross income,
deductions, and personal and additional exemptions, if any, are reported in one income 1. RFC- depends on the Predominance Test; if the
tax return, and one set of tax rates are applied on the tax base. ratio of the PH gross income over the world gross
A global tax system is one where the tax treatment views indifferently the tax base and income of the RFC in the 3-year period preceding
generally treats in common all categories of taxable income of the taxpayer (Tan v. Del the year of dividend declaration is:
Rosario, Jr., G.R. No. 109289 (1994)). a. At least 50%, the portion of the dividend
corresponding to the PH gross income ratio
is earned within;
ii. SCHEDULAR b. Less than 50%, the entire dividend received
is earned outside.
Under a schedular tax system, different types of income are subject to different sets of
graduated or flat income tax rates. The applicable tax rate(s) will depend on the 2. NRFC- earned outside
classification of the taxable income and the basis could be gross income or net income.
Separate income tax returns (or other types of return applicable) are filed by the The determining factor is the PLACE OF PERFORMANCE OF
recipient of income for the particular types of income received. Services/Practice of SERVICE.
Profession
A schedular approach in taxation is one where the income tax treatment varies and is IMMATERIAL:
made to depend on the kind or category of taxable income of the taxpayer. ØPlace of Execution of Contract
ØPlace of Payment

iii. OTHERS Rentals Location of the property

Royalties Place of use or exercise
Semi-schedular or Semi-global Tax System Sale of Real Property Location of realty

All compensation income, business, or professional income, capital gain and passive Sale of Personal Tangible
incomenot subject to final tax, and other income are added together to arrive at the Property 1. Manufactured w/inand sold w/o- Partly w/in and
gross income, and after deducting the sum of allowable deductions, the taxable income partly w/o the PH
is subjected to one set of graduated tax rates or normal corporate income tax. With 2. Manufactured w/o and sold w/in- Partly w/in and
respect to such income the computation is global. partly w/o the PH
3. Purchased w/in but sold w/o- Place of Sale
For those other income not mentioned above, they remain subject to different sets of 4. Purchased w/o but sold w/in- Place of sale
tax rates and covered by different return.
Intangible
4BLUE 95 NOTE: The Philippines, under the NIRC, follows a semi-schedular and
semi-global tax system GR: Placeof Sale
XPN: Shares ofstock of domestic corporations: Place of
. incorporation

FEATURES OF THE PHILIPPINE INCOME TAX LAW Annuities Place of Contract

Prizes Either where service rendered or where given
1. Direct Tax – The tax burden is borne by the income recipient upon whom the Pension Where given on account of services rendered
tax is imposed.

2. Progressive – The tax rate increases as the tax base increases. It is founded on BAR: Sure Arrival Airways (SAA) is a foreign corporation, organized under the laws of the
the ability to pay principle and is consistent with Sec. 28, Art. VI, 1987 Republic of Nigeria. Its commercial airplanes do not operate within Philippine territory, or
Constitution. service passengers embarking from Philippine airports. The firm is represented in the
Philippines by its general agent, Narotel. SAA sells airplane tickets through Narotel, and these
tickets are serviced by SAA airplanes outside the Philippines. The total sales of airplane tickets
3. Comprehensive – The Philippines has adopted the most comprehensive system transacted by Narotel for SAA in 2012 amounted to Pl0,000,000.00. The Commissioner of
of imposing income tax by adopting the citizenship principle, the residence Internal Revenue (CIR) assessed SAA deficiency income taxes at the rate of 30% on its taxable
principle, and the source principle. Any of the three principles is enough to income, finding that SAA's airline ticket sales constituted income derived from sources within
justify the imposition of income tax on the income of a resident citizen and a the Philippines. SAA filed a protest on the ground that the alleged deficiency income taxes
domestic corporation that are taxed on a worldwide income. should be considered as income derived exclusively from sources outside the Philippines since
SAA only serviced passengers outside Philippine territory. It, thus, asserted that the imposition
4. Semi-Schedular or Semi-Global Tax System – The Philippines follows the of such income taxes violated the principle of territoriality in taxation. Is the theory of SAA
semi-schedular or semi-global system of income taxation, although certain tenable? Explain. (5%) (2016 BAR)
passive investment incomes and capital gains from sale of capital assets (namely:
(a) shares of stock of domestic corporations, and (b) real property) are subject to SUGGESTED ANSWER: No. The activity which gives rise to the income is the sale of ticket in
final taxes at preferential tax rates. the Philippines, hence, the income from sale of tickets is an income derived from Philippine
sources which is subject to the Philippine income tax. Accordingly, there is no violation of the
principle of territoriality in taxation (Air Canada v. CIR, G.R. No. 169507, January 11, 2016,
CRITERIA IN IMPOSING PHILIPPINE INCOME TAX 778 SCRA 131).

i. CITIZENSHIP BAR: Triple Star, a domestic corporation, entered into a Management Service Contract with
A citizen of the Philippines is subject to Philippine income tax: Single Star, a non-resident foreign corporation with no property in the Philippines. Under the
1. On his worldwide income, if he resides inthe Philippines; or contract, Single Star shall provide managerial services for Triple Star‘s Hongkong branch. All
2. Only on his income from sources within the Philippines, if he qualifies as a non- said services shall be performed in Hongkong. Is the compensation for the services of Single
resident citizen. Star taxable as income from sources within the Philippines? Explain. (2014 Bar Question)

ii. RESIDENCE SUGGESTED ANSWER: No. Pursuant to the case of Commissioner of Internal Revenue v.
A resident alien is liable to pay Philippine income tax only on his income from sources within Baier-Nickel (G.R. No. 153793, August 29, 2006), the factor which determines the source of
the Philippines but is exempt from tax on his income from sources outside the Philippines. income for personal services is the place where the services were actually rendered. Since
Single Star, a non-resident foreign corporation, will perform all the managerial services for
iii. SOURCE Triple Star‘s branch in Hong Kong, all compensation income arising from the performance of
4BLUE 95: An alien is subject to Philippine income tax because he derives income from such services will be considered income from sources outside the Philippines, and therefore not
sources within the Philippines. Thus, a non-resident alien or non-resident foreign corporation is subject to Philippine income tax.
liable to pay Philippine income tax on income from sources within the Philippines, such as
dividend, interest, rent, or royalty, despite the fact that he has not set foot in the Philippines.

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CONCEPT OF INCOME c. TESTS IN DETERMINING WHETHER INCOME IS EARNED FOR TAX
PURPOSES

i. REALIZATION TEST
a. DEFINITION
No taxable income until there is a separation from capital of something of exchangeable
Income means all wealth which flows to the taxpayer other than a mere return of capital. value, thereby supplying the realization or transmutation which would result in the receipt
Income is a gain derived from labor or capital, or both labor and capital; and includes the of income. Thus, stock dividends are NOT income subject to income tax on the part of the
gain derived from the sale or exchange of capital assets. stockholder when he merely holds more shares representing the same equity interest in the
corporation that declared stock dividends.
Income includes earnings, lawfully or unlawfully acquired, without consensual
recognition, express or implied, of an obligation to repay and without restriction as their Income is recognized when both of the following conditions are met:
disposition. Income may be received in the form of cash, property, service, or a 1. the earning is complete or virtually complete; and
combination of the three. 2. an exchange has taken place.

Income v. Capital ii. CLAIM OF RIGHT DOCTRINE OR DOCTRINE OF OWNERSHIP, COMMAND,

The essential difference between capital and income is that capital is a fund; income is a OR CONTROL
flow. A fund of property existing at an instant of time is called capital. A flow of services Claim of Right Doctrine a.k.a. Doctrine of Ownership, Command, or Control
rendered by that capital by the payment of money from it or any other benefit rendered by In the claim-of-right doctrine, if a taxpayer receives money or other property and treats it
a fund of capital in relation to such fund through a period of time is called income. as its own under the claim of right that the payments are made absolutely and not
contingently, such amounts are included in the taxpayer's income, even though the right to
Classification of Income the income has not been perfected at that time. It does not matter that the taxpayer's title to
the property is in dispute and that the property may later be recovered from the
1. Compensation Income- Means all remuneration for services performed by an taxpayer(CIR v. Meralco, C.T .A. EB No. 773 (2012)).
employee for his employer under an employer-employee relationship, unless
explicitly excluded by the Tax Code or special law.
iii. ECONOMIC BENEFIT TEST OR DOCTRINE OF PROPRIETARY INTEREST
2. Profession or Business Income- The value derived from an exercise of Any economic benefit to the employee that increases his net worth, whatever may have
profession, business or utilization of capital including profit and gain derived been the mode by which it is effected, is taxable. Thus, in stock options, the difference
from sale or conversion of assets. Examples are net income from business and between the fair market value of the shares at the time the option is exercised and the
gain from the sale of assets used in trade or business. option price constitutes additional compensation income to the employee at the time of
exercise (not upon the grant or vesting of the right).
3. Passive Income- An income in which the taxpayer merely waits for the amount Anything that benefits a person materially or economically in whatever way is taxable.
to come in. Examples are royalty, interest, prizes, and winnings. However, note that a mere increase in the value of property without actual realization is
not taxable.
4. Capital Gain- An income derived from sale of assets NOT used in trade or
business. Examples are sale of family home and other capital assets. iv. SEVERANCE TEST
Under the severance test of income, in order that income may exist, it is necessary that
there be a separation from capital of something of exchangeable value. The income
requires a realization of gain.
b. WHEN INCOME IS TAXABLE Hence, the increase in value of an asset is not income as it has not yet been exchanged or
transferred for something else. Once the asset is exchanged, then a severance of the gain
from its original value takes place, resulting into taxable income.
i. EXISTENCE OF INCOME
v. ALL EVENTS TEST
Requisites for income to be taxable The all-events test requires the right to income or liability be fixed, and the amount of
1. There is INCOME, gain or profit such income or liability be determined with reasonable accuracy. However, the test does
2. RECEIVED or REALIZED during thetaxable year not demand that the amount of income or liability be known absolutely, only that a
3. NOT EXEMPT from income tax taxpayer has at his disposal the information necessary to compute the amount with
reasonable accuracy.
The all-events test is satisfied where computation remains uncertain, if its basis is
ii. REALIZATION OF INCOME unchangeable; the test is satisfied where a computation may be unknown, but is not as
much as unknowable, within the taxable year.
Income is realized when there is a gain or profit derived from a closed and completed The amount of liability does not have to be determined exactly; it must be determined
transaction. The realization of gain may take the form of actual receipt of cash or may with "reasonable accuracy." Accordingly, the term "reasonable accuracy" implies
occur as a constructive receipt of income. something less than an exact or completely accurate amount.(CIR v ISABELA)
Mere increase in the value of property without actual realization, either through sale or
other disposition, is not taxable. METHODS OF ACCOUNTING

i. DISTINGUISH: CASH AND ACCRUAL METHOD

Actual v. Constructive receipt
Principal Methods:
1. Actual receipt – Income is actuallyreduced to possession. The realization of 1. Cash method – income, profits, and gainsearned are not included in gross
gain may take the form of actual receipt of cash. income until received, and expenses are not deducted until paid.
2. Constructive receipt – An income is considered constructively received when it
is credited to the account of, or segregated in favor of, a person. N.B. ―received‖ here includes actual and constructive receipt.

2. Accrual method – income, profits, and gains are included in gross income when
earned, whether received or not, and expenses are allowed as deductions when
iii. RECOGNITION OF INCOME incurred, although not yet paid. It is the right to receive and NOT the actual
receipt that determines the inclusion of the amount in gross income.
Income realized pertains to the accrual basis of accounting.
Recognition of income in the books is when it is realized and expenses are recognized ii. SPECIAL METHOD: INSTALLMENT, DEFERRED PAYMENT, PERCENTAGE OF
when incurred. It is the right to receive and not the actual receipt that determines the COMPLETION (IN LONG-TERM CONTRACTS)
inclusion of the amount in gross income.
1. Installment Basis (Sec. 49, NIRC)
TAX FREE EXCHANGES: Taxpayer reports as income only a part of the gross profit to be realized from the sale on the
instalment plan equivalent to that proportion of the instalments received every year which the
GENERAL RULE: Upon the sale or exchange or property, the entire amount of the gross profit realized or to be realized when payment is completed bears to the CONTRACT
gain or loss, as the case may be, shall be recognized. PRICE.
EXCEPTION: • No gain or loss shall be recognized on a corporation or on its stock or Income to be Installment Gross
securities if such corporation is a party to a reorganization and exchanges property in reported for = Received x Profit
pursuance of a plan of reorganization solely for stock or securities in another the year
corporation that is a party to the reorganization
Initial payments mean the payments received in cash or property (other than evidence of
REQUISITES FOR THE NON-RECOGNITION OF GAIN OR LOSS ARE AS indebtedness of the purchaser) by the seller during the taxable year of the disposition of the real
FOLLOWS property(Sec 49(B), NIRC).
a) the transferee is a corporation;
b) the transferee exchanges its shares of stock for property/ies of the 2. Deferred Payment Sales
transferor; 1. Applicable when the initial payments exceed 25% of the selling price
c) the transfer is made by a person, acting alone or together with others, not 2. The income to be reported during the year of sale is the difference between the
exceeding four persons; and, selling or contract price and the cost of the property, even though the entire
d) as a result of the exchange the transferor, alone or together with others, not purchase price has not been actually received in the year of sale.
exceeding four, gains control of the transferee. 3. The obligations of the purchaser received by the vendor are considered as
equivalent of cash.
(CIR v FLI 2011) Bearing in mind the meaning of "gross income", it cannot be 3. Percentage of completion (Sec. 48, NIRC)
gainsaid, even then, that a mere increase or appreciation in the value of said shares Income from long-term contracts is reported for tax purposes on the basis of percentage of
cannot be considered income for taxation purposes. Since‖ a mere advance in the value completion. ―Long-term contracts‖ means building, installation, or construction contracts
of the property of a person or corporation in no sense constitute the ‗income‘ specified covering a period in excess of1 year.
in the revenue law," it has been held in the early case of Fisher v. Trinidad, that it
"constitutes and can be treated merely as an increase of capital." • Hence, the CIR has 4BLUE 95: Gross income already earned though not yet received, based on estimates of
no factual and legal basis in assessing income tax on the increase in the value of FDC's architects or engineers duly certified by them, is reported in a taxable year; and all deductions
shareholdings in FAC until the same is actually sold at a profit. relating to such gross income for the taxable year, even if not yet paid are taken into account.

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KINDS OF TAXPAYER
Taxpayer – any person subject to tax imposedby Title II of the Tax Code(Sec. 22(N), NIRC). BAR MATTER 2023
Person – means an individual, a trust, estate, or corporation(Sec. 22(A), NIRC).
SPECIAL EMPLOYEES
Primary Sub-Classification(s)
Classification Special employees are alien individuals or Filipino citizens who are subject to 15% tax
Citizens of the Resident citizens based on their gross compensation income when: •
Philippines Non-resident citizens
Resident 1. They are employed occupying managerial and/or technical positions with regional or
Aliens Engaged in Trade or area headquarters of •
Business in the a. multinational corporations, •
Individuals Non-residents Philippines b. petroleum service contractors and subcontractors, or •
Not Engaged in c. offshore banking units
Trade or Business in
the Philippines 2. If the special taxpayer is an alien, all of his gross compensation income received is
Special Classes of Minimum Wage Earner subject to 15% final tax.
Individuals
Domestic Corporations 3. If the taxpayer is a Filipino citizen, he has the option to be taxed at 15% final tax
Corporations Resident based on his gross compensation income received or a a regular income tax rate ( 0% -
Foreign Corporations Corporations 35%) based on the net taxable compensation income if his gross annual taxable
Non-resident compensation is least P975,000 ( whether or not actually received)
Corporations
Estates and Trusts
Partnerships General Partnership
General Professional Partnership 15% preferential tax rate vetoed

• Present and future qualified employees of existing ROHQ, RAHQ, OBU, and
1. INDIVIDUAL TAXPAYERS
Petroleum service contractors and subcontractors as of December 31, 2017 shall
enjoy preferential tax treatment.
CITIZENS • It shall not apply for employees of ROHQ, RAHQ, OBU and Petroleum service
contractors and subcontractors which registered with the SEC beginning January 1,
1. Resident Citizens (RC) 2018.

REVENUE MEMORANDUM CIRCULAR 83-2020: "where an individual is

prevented from leaving the Philippines on his or her scheduled date of Tests for Filipinos to avail of the option (prior to 1 Jan 2018)
departure as a result of the travel restrictions imposed by the government, the
individual will not be regarded as being present in the Philippines for tax A. Position and function test – employees must be occupying • managerial or
residence purposes for the period after the scheduled day of departure. • The technical position.
situation will be considered as ―force majeure‖ for the purpose of establishing
B Compensation test – employees must be paid in their contract (whether actual or
the individual‘s tax residence. This is on condition that the employee should
leave the Philippines as soon as the circumstances would permit or when the not, as long as stipulated in the contract) the amount of P975,000 per annum which
travel restrictions have been lifted." is the minimum amount.
C. Exclusivity Test - one employer at a time

2. Non-resident Citizens (NRC)(Sec. 22 (E), NIRC)

a. PH citizen who establishes to thesatisfaction of the CIR the fact of Alien Individuals Employed by an Offshore Gaming Licensee and Service
his physical presence abroad with a definite intention to reside Providers
therein.
b. PH citizen who leaves the Philippines during the taxable year to Shall pay a final withholding tax of 25% on their gross income. The minimum FWT due
reside abroad, either as an immigrant or for employment on a for any taxable month from said persons shall not be lower than P12,500.00. Gross
permanent basis.
income shall include, whether in cash or in kind,
c. PH citizen who works and derives income from abroad and whose
employment thereat requires him to be physically present abroad
most of the time during the taxable year. 1. basic salary/wages,
To be considered physically present abroad most of the time 2. annuities,
during the taxable year, a contract worker must have been 3. compensation,
outside the PH for not less than 183 days during such taxable 4. remuneration and
year(BIR R.R. 1-79, Sec. 2). 5. other emoluments, such as honoraria and allowances, received from such service
d. PH citizen previously considered as a non-resident citizen and providers or offshore gaming licensees.
who arrives during the taxable year to reside permanently in the
PH - Treated as NRC with respect to his income derived from
sources abroad until his arrival in the PH

4BLUE 95 NOTE: The term ―residence‖ is to be understood not in its common

acceptation as referring to ―dwelling‖ or ―habitation‖, but rather to “domicile” or
legal residence, that is, ―the place where a party actually or constructively has
his permanent home, where he, no matter where he may be found at any given
time, eventually intends to return and remain (animus manendi)‖(Japzon v. Taxpayer Within Without
COMELEC, G.R. No. 180088 (2009)) Resident Citizen / /
Non-resident Citizen and OCW / X
Resident Alien / X
ALIENS
Non-resident Alien / X
Domestic Corporation / /
1. Resident Alien- An alien actually present in the Philippines who is NOT a mere
transient or sojourner is a resident for income tax purposes. Foreign Corporation / X

a. No/Indefinite Intention = RESIDENT:

If he lives in the Philippines and has no definite intention as to his
stay, he is a resident. A mere floating intention indefinite as to
time, to return to another country is not sufficient to constitute
him a transient.

b. Definite Intention = TRANSIENT:

One who comes to the Philippines for a definite purpose, which in
its nature may be promptly accomplished, is a transient.

XPN: Definite Intention but such cannot be promptly accomplished; If his

purpose is of such nature that an extended stay may be necessary for its
accomplishment, and thus the alien makes his home temporarily in the
Philippines, then he becomes a resident.

2. Non-resident Alien
a. Engaged in trade or business within the Philippines- If the
aggregate period of his stay in the Philippines is more than 180
days during any calendar year(Sec. 25(A)(1), NIRC) 4BLUE 95: Only RESIDENT CITIZENS and DOMESTIC CORPORATIONS are taxable
b. Not engaged in trade or business within the Philippines - If the on income derived from ALL sources. All others are only taxable on income derived from
aggregate period of his stay in the Philippines does NOT exceed sources within PH.
180 days.

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2. CORPORATIONS

Includes all types of corporations, partnerships (no matter how created or organized),
joint stock companies, joint accounts (cuentasenparticipacion), associations, or insurance 3. ESTATE AND TRUSTS
companies, whether or not registered with the SEC.
Income tax imposed on individuals shall apply to income of estates or of any kind of
4BLUE 95: Excludes general professional partnerships (GPP); joint ventures or property held in trust(Sec. 60 (A), NIRC).
consortiums formed for the purpose of (1) undertaking construction projects or (2)
engaging in petroleum, coal, geothermal and other energy operations pursuant to an XPNs: (1) Employee‘s trust (Sec. 60, NIRC); (2) Revocable trusts (Sec. 63, NIRC); (3)
operating or consortium agreement under a service contract with the government(Sec. 22 Income for Benefit of Grantor (Sec. 64, NIRC)
(B), NIRC).
Taxable income of the estate or trust is computed in the same manner as an
individual,subject to certain special rules (Sec 61, NIRC)

LAW OF INCORPORATION TEST Estate- Refers to all the property, rights, and obligations of a person which are NOT
extinguished by his death and those which have accrued thereto since the opening of the
To determine the residence of a corporation, the Philippines adopted the Law of succession.
Incorporation test under which a corporation is considered domestic if it is organized or
created in accordance with or under the laws of the Philippines and foreign if it is Trust- An arrangement created by will or an agreement under which legal title to property
organized or created in accordance with or under the laws of a foreign country. is passed to another for conservation or investment with the income therefrom and
ultimately the corpus (principal) to be distributed in accordance with the directions of the
Domestic corporations- A corporation created and organized in the Philippines creator as expressed in the governing instrument.
or under its laws(Sec. 22 (C), NIRC).

Foreign corporations- A corporation which is not domestic(Sec. 22 (D), NIRC). BAR: Johnny transferred a valuable 10-door commercial apartment to a designated
trustee, Miriam, naming in the trust instrument Santino, Johnny‘s 10-year old son, as the
a. Resident foreign corporations – Foreign corporation engaged in sole beneficiary. The trustee is instructed to distribute the yearly rentals amounting to
trade or businesswithin the Philippines(Sec. 22 (H), NIRC). P720,000.00. The trustee consults you if she has to pay the annual income tax on the
rentals received from the commercial apartment. What advice will you give the trustee?
b. Non-resident foreign corporations – Foreign corporation not Explain. (3%)
engaged in trade or business within the Philippines(Sec. 22(I), SUGGESTED ANSWER: Page 33 of 195 Law on Taxation I will advise the trustee that
NIRC). she has nothing to pay in annual income taxes because the trust‘s taxable income is zero.
This is so because the amount of income to be distributed annually to the beneficiary is a
deduction from the gross income of the trust but must be reported as income of the
DOING BUSINESS beneficiary (Section 61(A), NIRC).

implies a continuity of commercial dealings and arrangements, and contemplates, to [b] Will your advice be the same if the trustee is directed to accumulate the rental income
that extent, the performance of acts or works or the exercise of some of the functions and distribute the same only when the beneficiary reaches the age of majority? Why or
normally incident to, and in progressive prosecution of commercial gain or for the why not? (3%)
purpose and object of the business organization(CIR v. BOAC, G.R. No. L-65773 SUGGESTED ANSWER: No, the trustee has to pay the income tax on the trust‘s net
(1987)). income determined annually if the income is required to be accumulated. Once a taxable
trust is established , its net income is either taxable to the trust, represented by the trustee,
Includes: or o the beneficiary depending on the provision for distribution of income following the
one-layer taxation scheme (Section 61(A), NIRC). (BAR 2009)
1. soliciting orders, service contracts
2. opening offices, whether called "liaison"offices or branches
3. appointing representatives or distributorsdomiciled in the Philippines or who in
any calendar year stay in the country for a period totaling 180 days or more
4. participating in the management, supervision or control of any domestic
business, firm, entity or corporation in the Philippines.

Excludes:

1. mere investment as a shareholder indomestic corporations, and/or the exerciseof

rights as such investor
2. having a nominee director or officer torepresent its interests in such corporation 4. PARTNERSHIP, JOINT VENTURES, CO-OWNERSHIP
3. appointing a representative or distributor domiciled in the Philippines which
transacts business in its own name and for its own account(RA 7042, Foreign A.General Partnerships- A partnership which is not a general professional partnership.
Investments Act). Treated as a corporation.

BAR: A, a foreign corporation organized and existing under the foreign law, was
granted an authority to operate by the Civil Aeronautics Board (CAB). It doesn‘t have B.General Professional Partnerships (GPP)- A partnership formed by persons for the
flight originating from or coming to the Philippines and does not operate any airplane. sole purpose of exercising their common profession, no part of the income of which is
As an offline carrier, A through B, its general sales agent in the PH, sells passage derived from engaging in any trade or business(Sec. 22 (B), NIRC).
documents and files its income tax returns on Gross Philippine Billings. A then filed a
The partners themselves, NOT THE PARTNERSHIP, shall be liable for income tax in
written claim for refund of alleged erroneous paid income taxes before the BIR
their separate and individual capacities. Each partner shall report as gross income his
contending that by the appointment of B, it cannot be considered as having a ―permanent distributive share, actually or constructively received, in the net income of the
establishment‖ in the Philippines given the nature of its operation. partnership(Sec. 26, NIRC).
1) Is A a resident foreign corporation?
2) What constitutes doing business in order to classify a corporation as a resident foreign
corporation?

Suggested Answer: C.Joint venture and consortium- Essential factors of a joint venture or consortium:
1) Yes, A is a resident foreign corporation for income tax purposes. The Implementing
Rules and Regulations of Republic Act No. 7042 (Foreign Investments Act) clarifies 1. Each party must make a contribution, not necessarily of capital but by way of
that "doing business" includes "appointing representatives or distributors, operating services, skill, knowledge, material or money;
under full control of the foreign corporation, domiciled in the Philippines or who in any 2. Profits must be shared among the parties;
3. There must be a joint proprietary interest and right of mutual control over the
calendar year stay in the country for a period or periods totaling one hundred eighty
subject matter of the enterprise;
(180) days or more." In this case, through B, A is able to engage in an economic activity 4. There is a single business transaction.
in the Philippines – B performs acts, or exercises functions that are incidental and
beneficial to the purpose of A's business, and enters into any contract on behalf of A,
with the express written consent and according to the standards required by the latter. A joint venture or consortium is treated as a corporation, except those formed for the
Moreover, A was issued by the CAB an authority to operate as an offline carrier in the purpose of:
Philippines for a period of five years. A is, therefore, a resident foreign corporation. Its
income from sale of airline tickets, through B, is income realized from the pursuit of its 1. Undertaking construction projects, or
business activities in the Philippines. (Air Canada v. CIR, GR No. 169507, 2016
2. Engaging in petroleum, coal, geothermal and other energy operations pursuant to
2) Doing business constitutes any act that implies continuity of commercial dealings or an operating consortium agreement under a service contract with the
arrangements or the exercise of functions normally incidental to and in the progressive Government.
prosecution of commercial gain or for the purpose of the business. (Sec. 3 (d), Foreign
Investment Act; Air Canada v. CIR, GR No. 169507, 2016)

D.Co-ownership- There is co-ownership whenever the ownership of an undivided thing

or right belongs to different persons(Art. 484, NCC).

Co-ownerships are NOT subject to tax as a corporation if the activities of the co-owners
are limited to the preservation of the property and the collection of the income therefrom,
in which case each co-owner is taxed individually on his distributive share in the income
of the co- ownership.

5
GROSS INCOME

BAR: YYY Corporation engaged the services of the Manananggol Law Firm in 2006 to
DEFINITION
defend the corporation‘s title over a property used in the business. For the legal services
rendered in 2007, the law firm billed the corporation only in 2008. The corporation duly
Gross Income means all income derived from whatever source, including (but not
paid. YYY Corporation claimed this expense as a deduction from gross income in its
limited to) the following items:
2008 return, because the exact amount of the expense was determined only in 2008. Is
1. Compensation for services in whateverform paid, including, but not
YYY‘s claim of deduction proper? Reasons. (4%)
limited to fees, salaries, wages, commissions, and similar items;
SUGGESTED ANSWER: No. The expense is deductible in the year it complies with the
2. Gross income derived from the conduct oftrade or business or the
all-events test. The test is considered met if the liability is fixed, and the amount of such
exercise of aprofession;
liability is determined with reasonable accuracy. The liability to pay is already fixed in
3. Gains derived from dealings in property;interests; rents; royalties;
2007 when the services were rendered, and the amount of such liability is determinable
dividends; annuities; prizes and winnings; pensions; and partner's
with reasonable accuracy in the same year. Hence the deduction should have been
distributive share from the net income of the general professional
claimed in 2007 and not in 2008. (CIR v. Isabela Cultural Corporation, SIS SCRA 556
partnership(Sec. 32 (A), NIRC).
[2007]). (BAR 2009)
The list here is NOT exclusive.

The definition of gross income is broad enough to include all passive income subject to BAR: In 2010, Juliet Ulbod earned P500,000.00 as income from her beauty parlor and
specific rates or final taxes. However, since these passive incomes are already subject to received P250,000.00 as Christmas gift from her spinster aunt. She had no other receipts
for the year. She spent P150,000.00 for the operation of her beauty parlor. For tax
different rates and taxed finally at source, they are no longer included in the computation
of gross income which determines taxable income(CIR v. PAL, GR 160628 (2006)). purposes, her gross income for 2010 is: (2011 Bar Question) P500,000

BAR: In 2010, Mr. Platon sent his sister Helen $1 ,000 via a telegraphic transfer through
DISTINGUISH: GROSS INCOME, NET INCOME, AND TAXABLE INCOME
the Bank of PI. The bank's remittance clerk made a mistake and credited Helen with
$1,000,000 which she promptly withdrew. The bank demanded the return of the
Gross income – The total income of a taxpayer subject to tax. It includes the gains,
mistakenly credited excess, but Helen refused. The BIR entered the picture and
profits, and income derived from whatever source, whether legal or illegal(Sec.
investigated Helen. Would the BIR be correct if it determines that Helen earned taxable
32(A), NIRC). It does not include income excluded by law, or which are exempt
income under these facts? (1%) (2013 Bar Question)
from income tax(Sec. 32(B), NIRC).
SUGGESTED ANSWER: Yes, income is income regardless of the source. Section 32 of
the NIRC defines gross income as all income derived from whatever source.
Net income – Means gross income less statutory deductions and exemptions (Sec.
Consequently, the flow of wealth, without any distinction as to the lawfulness of its
31, NIRC).
source, is subject to income tax. In other words, the phrase ―income from whatever
source‖ discloses a legislative policy to include all income not expressly exempted
Taxable income – means the pertinent items of gross income specified in the Tax
within the class of taxable income under the law.
Code, less the deductions, if any, authorized for such types of income by the Tax
Code or other special laws (Sec. 31, NIRC). It is synonymous to the term ―net
income.‖
BAR: Mr. Gipit borrowed from Mr. Maunawain P100,000.00, payable in five (5) equal
monthly installments. Before the first installment became due, Mr. Gipit rendered Page
BAR: Aleta sued Boboy for breach of promise to marry. Boboy lost the case and duly
paid the court's award that included, among others, Pl00,000 as moral damages for the 39 of 195 Law on Taxation general cleaning services in the entire office building of Mr.
Maunawain, and as compensation therefor, Mr. Maunawain cancelled the indebtedness
mental anguish Aleta suffered. Did Aleta earn a taxable income? (1%)(2013 Bar
Question) of Mr. Gipit up to the amount of P75,000.00. Mr. Gipit claims that the cancellation of
SUGGESTED ANSWER: She had no taxable income since moral damages are his indebtedness cannot be considered as gain on his part which must be subject to
income tax, because according to him, he did not actually receive payment from Mr.
compensatory. Exemplary and moral damages awarded to a party-litigant are not
Maunawain for the general cleaning services. Is Mr. Gipit correct? Explain. (2014 Bar
considered taxable income (America N.A.-Manila Branch vs. Commissioner of Internal
Question)
Revenue, CTA Case No. 6144, March 14, 2005).
SUGGESTED ANSWER : No. Section 50 of Rev. Regs. No. 2, otherwise known as
Income Tax Regulations, provides that if a debtor performs services for a creditor who
cancels the debt in consideration for such services, the debtor realizes income to that
BAR: Hopeful Corporation obtained a loan from Generous Bank and executed a
amount as compensation for his services. In the given problem, the cancellation of Mr.
mortgage on its real property to secure the loan. When Hopeful Corporation failed to pay
Gipit‘s indebtedness up to the amount of Php 75,000.00 gave rise to compensation
the loan, Generous Bank extrajudicially foreclosed the mortgage on the property and
income subject to income tax, since Mr. Maunawain condoned such amount as
acquired the same as the highest bidder. A month after the foreclosure, Hopeful
consideration for the general cleaning services rendered by Mr. Gipit.
Corporation exercised its right of redemption and was able to redeem the property. Is
Generous Bank liable to pay capital gains tax as a result of the foreclosure sale? Explain.
BAR: In 2011, Solar Computer Corporation (Solar) purchased a proprietary
(2014 Bar Question)
membership share covered by Membership certificate No. 8 from the Mabuhay Golf
SUGGESTED ANSWER : No. Since Hopeful Corporation exercised its right to redeem
Club, Inc. for P500, 000.00. On December 27, 2012, it transferred the same to David, its
the property, Generous Bank is not liable to pay capital gains tax on the foreclosure sale.
American consultant, to enable him to avail of the facilities of the Club. David executed
As stated in the analogous case of Supreme Transliner, Inc., v. BPI Family Savings
a Deed of Declaration of Trust and Assignment of Shares wherein he acknowledged the
Bank, Inc. (G.R. No. 165617, February 25, 2011, 644 SCRA 59), Rev. Regs. No. 4-99
expressly provides that if a mortgagor exercises his right of redemption within one year absolute ownership of Solar over the share; that the assignment was without any
consideration; and that the share was placed in his name because the Club required it to
from the issuance of the certificate of sale, no capital gains tax shall be imposed because
be done. In 2013, the value of the share increased to P800,000.00. Is the said assignment
no sale or transfer of real property was realized. It is only in case of non-redemption by
a ―gift‖ and, therefore, subject to gift tax? Explain. (2016 BAR)
Hopeful Corporation that the obligation to pay capital gains tax arises, which shall be
A: NO. The assignments are not gratuitous, and there is no intent to transfer ownership
based on the bid price of the highest bidder. The tax will be imposed only upon the
hence not subject to gift tax. The value of the right to avail of the privileges attendant to
expiration of the one-year period of redemption. Furthermore, the obligation to pay the
Mabuhay Golf Club, Inc. Membership Certificate is due to David‘s merits or services as
capital gains tax would primarily fall on the mortgagor, Hopeful Corporation, and not on
a computer consultant. It is a fringe benefit taxable to the employer. (Sec. 33(B)(6),
Generous Bank.
NIRC)
BAR: Mr. A was preparing his income tax return and had some doubt on whether a
BAR: As a way to augment the income of the employees of DEF, Inc., a private
commission he earned should be declared for the current year or for the succeeding year.
corporation, the management decided to grant a special stipend of ₱50,000.00 for the
He sought the opinion of his lawyer who advised him to report the commission in the
first vacation leave that any employee takes during a given calendar year. In addition,
succeeding year. He heeded his lawyer's advice and reported the commission in the
the senior engineers were also given housing inside the factory compound for the
succeeding year. The lawyer's advice turned out to be wrong; in Mr. A's petition against
purpose of ensuring that there are available engineers within the premises every time
the BIR assessment, the court ruled against Mr. A. Is Mr. A guilty of fraud? (1%)(2013
there is a breakdown in the factory machineries and equipment.
Bar Question)
(a) Is the special stipend part of the taxable income of the employees receiving the
SUGGESTED ANSWER: (A) Mr. A is not guilty of fraud as he simply followed the
same? If so, what tax is applicable and what is the tax rate? Explain. A: The special
advice of his lawyer. In Santos v. People of the Philippines and BIR, the Court of Tax
stipend is a taxable income of an employee. If the individual is a rank-andfile employee,
Appeals (CTA) acquitted Santos from the criminal case of tax evasion and ruled that
the same forms part of his compensation income and it is subject to income tax (or
failure to supply correct and accurate information must be fully established as a positive
withholding tax on compensation) at a schedular rate. However, if the stipend allowance,
act or state of mind; it cannot be presumed nor attributed to mere inadvertent or
if lumped-up with 13th month pay and other benefits, the aggregate amount do not
negligent acts. Moreover, the CTA reiterated the doctrine in Yulivo Sons hardware v.
exceed the exclusion threshold of P90,000.00, the same shall be excluded from gross
Court of Tax Appeals (G.R. No. L- 13203), January 28, 1961, 1 SCRA 169) that mere
income and not subject to income tax. If the employee is not a rank-and-file employee
understatement of a tax is not itself proof of fraud for the purpose of tax evasion. In the
(but a managerial or supervisory), the same is subject to fringe benefits tax or final tax at
present case, Mr. A relied in good faith on the expertise of his lawyer in not declaring
35% based on the grossed-up monetary value of the special stipend. (Sec. 33, NIRC, as
his income for that year. Therefore, he is not guilty of fraud.
amended)
(b) Is the cash equivalent value of the housing facilities received by the senior engineers
BAR: An individual, who is a real estate dealer, sold a residential lot in Quezon City at a
subject to fringe benefits tax? Explain. (2019 BAR) A: NO, the cash equivalent value of
gain of P100,000.00 (selling price of P900,000.00 and cost is P800,00.00). The sale is
the housing facilities inside the factory granted to the senior engineers are not considered
subject to income tax as follows: (2012 BAR)
as fringe benefits subject to tax. The housing facility is furnished by the employer for his
a) 6% capital gains tax on the gain;
convenience or advantage because it is furnished to ensure that the senior engineers are
b) 6% capital gains tax on the gross selling price of fair market value, whichever is
higher; always available to attend to possible breakdown of machineries and equipment.
Benefits which are granted for the convenience or advantage of the employer are exempt
c) Ordinary income tax at the graduated rates of 5% to 32% of net taxable income;
from the fringe benefits tax. (Sec. 2.33(A), RR No. 03-98 implementing Sec. 33, NIRC)
d) 30% income tax on net taxable income.
SUGGESTED ANSWER: c) Ordinary income tax at the graduated rates of 5% to 32%
of net taxable income Section 24, NIRC.

6
BAR: Mr. Sebastian is a Filipino seaman employed by a Norwegian company which is BAR: Mr. C is employed as a Chief Executive Officer of MNO Company, receiving an
engaged exclusively in international shipping. He and his wife, who manages their annual compensation of ₱ 10,000,000.00, while Mr. S is a security guard in the same
business, filed a joint income tax return for 1997 on March 15,1998. After an audit of company earning an annual compensation of ₱ 200,000.00. Both of them source their
the return, the BIR issued on April 20, 2001 a deficiency income tax assessment for the income only from their employment with MNO Company. (2019 BAR)
sum of P250,000.00, inclusive of interest and penalty. For failure of Mr. and Mrs.
Sebastian to pay the tax within the period stated in the notice of assessment, the BIR (a) At the end of the year, is Mr. C personally required to file an annual income
issued on August 19, 2001 warrants of distraint and levy to enforce collection of the tax. tax return? Explain. A: NO, Mr. C is not required, as he is qualified for substituted
What is the rule of income taxation with respect to Mr. Sebastian's income in 1997 as a filing of income tax return under Section 51(A) of the NIRC, since he is receiving
seaman on board the Norwegian vessel engaged in international shipping? Explain your purely compensation income from one employer (MNO Company) in the
answer. (2002 BAR) Philippines for a given calendar year; provided the employer has correctly withheld
A: Mr. Sebastian‘s income as seaman on board the Norwegian vessel engaged in the tax on the said compensation income.
international shipping shall not be subjected to income tax. An individual citizen of the
Philippines who is working and deriving income from abroad as an overseas contract (b) How about Mr. S? Is he personally required to file an annual income tax
worker is taxable only on income derived from sources within the Philippines: provided, return? Explain. A: NO, Mr. S is also not required. Since the only income earned
that a seaman who is a citizen of the Philippines and who receives compensation for (P 200,000) during the taxable year did not exceed the exemption threshold of P
services rendered abroad as a member of the complement of a vessel engaged 250,000 provided in the NIRC, the employee need not file the income tax return.
exclusively in international trade shall be treated as an overseas contract worker. (Sec. (Sec. 51(A)(2)(a), NIRC, as amended by R.A. No. 10963 – TRAIN Law)
23(C), NIRC) ALTERNATIVE ANSWER: Based on the amount of annual compensation income
Mr. Sebastian shall be considered as an overseas contract worker. His income as Mr. S received, he is considered a minimum wage earner. Being a minimum wage
seaman, which is an income from without the Philippines, shall not be liable for income earner, he is not required to file an income tax return. (Sec. 51(A)(2)(d), NIRC)
tax in the Philippines.

BAR: Kronge Konsult, Inc. (KKI) is a Philippine corporation engaged in architectural FRINGE BENEFITS AND LEAVE CREDITS (TO BE DISCUSSED ON PAGE 9):
design, engineering, and construction work. Its principal office is located in Makati City,
but it has various infrastructure projects in the country and abroad. Thus, KKI employs
both local and foreign workers. The company has adopted a policy that the employees' BAR: Mapagbigay Corporation grants all its employees (rank and file, supervisors, and
salaries are paid in the currency of the country where they are assigned or detailed. managers) 5% discount of the purchase price of its products. During an audit
Below are some of the employees of KKI. Determine whether the compensation they investigation, the BIR assessed the company the corresponding tax on the amount
received from KKI in 2017 is taxable under Philippine laws and whether they are equivalent to the courtesy discount received by all the employees, contending that the
required to file tax returns with the Bureau of Internal Revenue (BIR). courtesy discount is considered as additional compensation for the rank-and-file
employees and additional fringe benefit for the supervisors and managers. In its defense,
(a) Kris Konejero, a Filipino accountant in KKl's Tax Department in the Makati the company argues that the discount given to the rank-and-file employees is a de
office, and married to a Filipino engineer also working in KKI; A: Taxable. minimis benefit and not subject to tax. As to its managerial employees, it contends that
(Sec. 23 & 24(A), NIRC) Kris must file tax returns with the BIR, unless she the discount is nothing more than a privilege and its availment is restricted. Is the BIR
qualifies for substituted filing of income tax returns because the tax was assessment correct? Explain. (2016 BAR)
correctly withheld by the employer. (Sec. 51(A)(2)(b), NIRC) A: NO. The 5% discount of the purchase price of its products, so-called ―courtesy
discounts‖ on purchases, granted by Mapagbigay Corporation to all its employees (rank
(b) Klaus Kloner, a German national who heads KKl's Design Department in its and file, supervisors, and managers) otherwise known as ―de minimis benefits,‖
Makati office; A: Taxable being an income earned by a resident alien from furnished or offered by an employer to his employees merely as a means of promoting
Philippine sources. (Sec. 23 & 24(A), NIRC) Klaus is required to file a tax the health, goodwill, contentment, or efficiency of his employees, are not considered as
return unless the compensation income from KKJ is his only returnable income compensation subject to income tax and consequently to withholding tax. (RR No. 02-
and the withholding tax thereon was correctly withheld by his employer. (Sec. 98, Sec. 2.78.1(A)(3), as amended by RR No. 08-2000, RR No. 05-2008, RR No. 10-
51(A)(2)(b), NIRC) 2008, RR No. 05-2011, and RR No. 08-2012) As such, de minimis benefits, if given to
supervisors and managerial employees, they are also exempt from the fringe benefits
(c) Krisanto Konde, a Filipino engineer in KKl's Design Department who was tax.
hired to work at the principal office last January 2017. In April 2017, he was
assigned and detailed in the company's project in Jakarta, Indonesia, which
project is expected to be completed in April 2019; A: His compensation from
January 1 up to the time he left the Philippines is taxable and he must file tax BAR: A, an employee of the Court of Appeals, retired upon reaching the compulsory
returns, unless the compensation income is his only returnable income, and the age of 65 years. Upon compulsory retirement, A received the money value of his
withholding tax thereon was correctly withheld by KKI. (Sec. 51(A)(2)(b), accumulated leave credits in the amount of P 500,000.00. Is said amount subject to tax?
NIRC) The compensation for his services abroad from the date of bis actual Explain. (1996 BAR)
assignment thereat up to the time of the completion of the project is not taxable A: NO. The accumulated leave credits in the amount of P 500,000.00 is not subject to
being an income from a source without the Philippines earned by a non-resident tax. The monetized value of leave credits paid to government officials and employees
citizen. (Secs. 23 & 42, NIRC) He is not required to file a return for this income shall not be subject to income tax and consequently to withholding tax. (RR No. 03-98,
derived from without, because said income is not subject to income tax in the Sec. 2.78.1(A)(7), 3rd sentence, as amended by RR No. 10- 2000)
Philippines. (Sec. 23, NIRC)

(d) Kamilo Konde, Krisanto's brother, also an engineer assigned to KKl's project
in Taipei, Taiwan. Since KKI provides for housing and other basic needs,
Kamila requested that all his salaries, paid in Taiwanese dollars, be paid to his
wife in Manila in its Philippine Peso equivalent
A: Not taxable and no need to file tax returns. Kamilo is a non-resident citizen
who is taxable only on income from sources within the Philippines.
Compensation for services rendered outside of the Philippines is an income from
a source without the Philippines which is not subject to the Philippine income
tax. (Secs. 23 & 42, NIRC)

(e) Karen Karenina, a Filipino architect in KKl's Design Department who

reported back to KKl's Makati office in June 2017 after KKl's project in Kuala
Lumpur, Malaysia was completed. (2018 BAR) A: Compensation from January
1 up to the time of her return in June 2017 is an income from a source without
the Philippines which is not taxable if received by a nonresident citizen. (Secs.
23 & 42, NIRC) Compensation from June 2017 to December 31, 2017 is an
income from a source within the Philippines and taxable to Karen, who is
taxable on worldwide income from the time she regained the status of a resident
citizen and accordingly, must file returns to pay for the tax, unless she is purely
compensation income earner for which the withholding tax on wages was
correctly withheld by KKI. (Sec. 51(A)(2)(b), NIRC)

7
SOURCES OF INCOME SUBJECT TO TAX
iii. COMPENSATION INCOME
i. ANNUITIES AND PROCEEDS FROM LIFE INSURANCE OR OTHER TYPES OF
INSURANCE
It refers to periodic installment payments of income or pension by insurance companies All remunerations for services performed by an employee for his employer under
during the life of a person or for a guaranteed fixed period of time, whichever is longer, an employer- employee (ER-EE) relationship, unless excepted under the provisions
inconsideration of capital paid by him. It is paid annually, monthly, or periodically, of the NIRC are considered as compensation income.
computed upon the amount paid yearly, but necessarily for life.
It includes, but is not limited to, salaries and wages, honoraria and emoluments,
The annuity payments represent a part that is taxable and not taxable. allowances (e.g., transportation, representation, entertainment), commissions, fees
If part of annuity payment represents interest, then it is a taxable income. (including directors‘ fees, if the director is, at the same time, an employee of the
If the annuity is a return of premium, it is not taxable. payor-corporation), tips, taxable bonuses, fringe benefits except those subject to
Fringe Benefit Tax (FBT) under Section 33 of the Tax Code, and taxable pensions
4BLUE 95 : The proceeds of life insurance received by a child as irrevocable beneficiary and retirement pay (e.g., retirement benefits earned without meeting the conditions
are not to be reported in the annual income tax returns, because they are excluded from
for exemption thereof, such as retirement of less than 50 years of age.)
gross income. This kind of receipt does not fall within the definition of income – ―Many
wealth which flows into the taxpayer other than a mere return of capital.‖ Since insurance
is compensatory in nature, the receipt is merely considered as a return of capital. (Sec. The term wages does NOT include remuneration paid:
32(B)(1), NIRC; Fisher v. Trinidad, 43 Phil. 73, 1922)
1. For agricultural labor paid entirely in products of the farm where the labor
is performed
ii. PRIZES AND AWARDS 2. For domestic service in a private home
3. For casual labor not in the course of theemployer's trade or business
Prizes 4. For services by a citizen or resident of thePhilippines for a foreign
1. 10,000orless–partofGI subject to the graduated rates for individuals government or an international organization(Sec. 78(A), NIRC).
2. more than 10,000
1. 20% FWT - RC, NRC,RA and NRA-ETB
2. 25% FWT – NRA-NETB GR: Compensation income including overtime pay, holiday pay, night shift
3.Part of the GI of the Corporation, regardless of the amount
differential pay, and hazard pay, earned by MINIMUM WAGE EARNERS
(MWE) who has no other returnable income are NOT taxable and not subject to
Winnings
withholding tax on wages (RA 9504);
20% final tax (except winnings amounting to P10,000.00 or less from PCSO and Lotto which
shall be exempt)
Tax-Exempt Prizes and Awards
XPN: If he receives/earns additional compensation such as commissions,
Prizes and Awards in religious, charitable, etc. achievements
honoraria, fringe benefits, benefits in excess of the allowable statutory amount of
P90,000(RA 10963), taxable allowance, and other taxable income other than the
1. recipient was selected without any action on his part to enter the contest or statutory minimum wage (SMW), holiday pay, overtime pay, hazard pay and night
proceeding; and shift differential pay.
2.
3. recipient is not required to render substantial future services as a condition to
receiving the prize or award(Sec. 32(B)(7)(c), NIRC). FORMS OF COMPENSATION AND HOW THEY ARE ASSESSED

4BLUE 95: Prizes and awards granted to athletes in local and international sports Cash – If compensation is paid in cash, the full amount received is the
competitions and tournaments held in the Philippines and abroad and sanctioned by their measure of the income subject to tax.
national associations shall be EXEMPT from income tax.
A prize is a reward for a contest or a competition. Such payment constitutes gain derived Medium other than money – If services are paid for in a medium other than
from labor.
money (e.g., shares of stock, bonds, and other forms of property), the fair
XPNs: market value (FMV) of the thing taken in payment is the amount to be
1. Prizes and awards made primarily in recognition of religious, charitable, included as compensation subject to tax. If the services are rendered at a
scientific, educational, artistic, literary, or civic achievements are EXCLUSIONS stipulated price, inthe absence of evidence to the contrary, such price will be
from gross income if: presumed to be the FMV of the remuneration received.
a. The recipient was selected without any action on his part to enter
a contest or proceedings; and *If meals, living quarters, and other facilities and privileges are furnished to
b. The recipient is not required to render substantial future services an employee for the convenience of the employer, and incidental to the
as a condition to receiving the prize or award. requirement of the employee‘s work or position, the value of that privilege
need NOT be included as compensation.
2. Prizes and awards granted to athletes in local and international sports
competitions and tournaments held in the Philippines and abroad and sanctioned
by their national associations shall be EXEMPT from income tax.
PAYMENT IN KIND (4BLUE 95) :
BAR: Mr. A, a citizen and resident of the Philippines is a professional boxer. In a professional
boxing match held in 2013, he won prize money in United States (US) dollars equivalent to P 1. STOCK OPTIONS. • Stock options are taxable as compensation income
300, 000.00. taxed only if there is a benefit to the employee such as when he can buy
the share at a more favorable price than the public. • The tax will be on the
a. Is the prize money paid to and received by Mr. A in the US taxable in the Philippines? amount of the difference between the book value or the FMV of the stock,
Why? A: YES. Under the Tax Code, the income within and without of a resident citizen is whichever is higher, and the exercise price. It is imposed whether or not
taxable. Since Mr. A is a resident Filipino citizen, his income worldwide is taxable in the the stock option is exercised.
Philippines. (Sec. 23(A)(1), NIRC)
2.PROMISSORY NOTES. Equivalent to the face value of the promissory
b. May Mr. A‘s prize money qualify as an exclusion from his gross income?Why? A: note, unless it is discounted. For a discounted promissory note, the cash
NO. Under the law, all prizes and awards granted to athletes in local and international discounted value.
sports competitions and tournaments whether held in the Philippines or abroad and
sanctioned by their national sports associations are excluded from gross income. The
exclusion find application only to amateur athletes where the prize was given in an event 3. CANCELLATION OF DEBT. Considered an income when you render
sanctioned by the appropriate national sports association affiliated with the Philippine services and in exchange, your debt is forgiven.
Olympic Committee and not to professional athletes like Mr. A. Therefore, the prize
money would not qualify as an exclusion from Mr. A‘s gross income. (Sec. 32(B)(7)(d), 4. TAX LIABILITY. When the employer shoulders your tax on
NIRC) compensation instead of you getting less than your gross monthly salary.

c. The US already imposed and withheld income taxes from Mr. A‘s prize money. How
may Mr. A use or apply the income taxes he paid on his prize money to the US when he 4 BLUE 95: HOW BOUT RATA? Petitioners further assert that the imposition of
computes his income tax liability in the Philippines for 2013? (2015 BAR) A: The income withholding tax on these allowances, bonuses and benefits, which have been
taxes withheld and paid to the US government maybe claimed by Mr. A, either as a allotted by the Government to its employees free of tax for a long time, violates the
deduction from his gross income (Sec. 34(C)(1)(b), NIRC) or as a tax credit (Sec. prohibition on nondiminution of benefits under Article 100 of the Labor Code; and
34(C)(3)(a), NIRC) from the income tax due when he computes his Philippine income tax
infringes upon the fiscal autonomy of the Legislature, Judiciary, Constitutional
liability for taxable year 2013.
Commissions and Office of the Ombudsman granted by the Constitution
BAR: Mr. D, a Filipino amateur boxer, joined an Olympic qualifying tournament held in Las RULING: The name designated to the compensation income received by an
Vegas, USA, where he won the gold medal. Pleased with Mr. D's accomplishment, the employee is immaterial • Thus, salaries, wages, emoluments and honoraria,
Philippine Government, through the Philippine Olympic Committee, awarded him a cash prize allowances, commissions, fees, (including director's fees, if the director is, at the
amounting to ₱ 1,000,000.00. Upon receipt of the funds, he went to a casino in Pasay City and same time, an employee of the employer/corporation), bonuses, fringe benefits
won the ₱ 30,000,000.00 jackpot in the slot machine. The next day, he went to a nearby Lotto (except those subject to the fringe benefits tax under Section 33 of the Tax Code),
outlet and bought a Lotto ticket which won him a cash prize of ₱ 5,000.00. Which of the above pensions, retirement pay, and other income of a similar nature, constitute
sums of money is/are subject to income tax? Explain. (2019 BAR) A: Only the amount of P compensation income that are taxable and subject to withholding.
30,000,000.00, constituting the winnings from casino, is subject to income tax, specifically to a
final tax at the rate of 20%. (Sec. 24(B)(1), NIRC, as amended)
The cash prize of P 1,000,000 is exempt from taxation under Section 32(B)(7)(d) of the NIRC,
as amended, considering that it is in the nature of a prize granted to Mr. D as an athlete after iv. PENSION, RETIREMENT BENEFIT, OR SEPARATION PAY
winning an international sports competition, i.e., an Olympic qualifying tournament, sanctioned
by his national sports association. Meanwhile, under Section 24(B)(1) of the NIRC, the A stated allowance paid regularly to a person on his retirement or to his dependents on his
winnings amounting to P 10,000 or less from Lotto shall be exempt from tax, therefore the death, in consideration of past services, meritorious work, age, loss or injury.
Lotto prize of P 5,000 is not subject to income tax. (NIRC, Sec. 24(B)(1), amended by
R.A.10963 – TRAIN Law

8
v. FRINGE BENEFITS (NOT FOR RANK & FILE)

Fringe benefits NOT subject to Fringe Benefit Tax:

Fringe benefit means any goods, services, or other benefit furnished or granted in
cash or in kind, in addition to basic salaries, to an individual 1. Fringe Benefits which are authorized and exempted from income tax under
employee(managerial/supervisory employees), except a rank and file the Code or under special laws (such as 13th month pay and other benefits
employee(RR No. 03-98, Sec 2.23b) with the ceiling of P90,000);

Fringe Benefits shall be subject to FBT (35%) which shall be treated as final 2. Contributions of the employer for the benefit of the employee for
income tax on the employee that shall be withheld and paid by the employer. retirement, insurance and hospitalization benefit plans;

Fringe benefit includes but not limited to the following: 3. Benefits given to the rank-and-file employees, whether granted under a
collective bargaining agreement or not; and
1. Housing
2. Expense Account 4. Fringe benefits required or necessary to the business of the employer; if it
3. Vehicle of any kind is granted for the convenience or advantage of the employer(FB not
4. Household personnel, such as maid,driver and others considered as gross income);
5. Interest on loan at less than market rateto the extent of the difference
between the market rate and actual rate granted.
6. Membership fees, dues and other expenses borne by the employer for the 5. De minimis benefits(exempt from income tax and withholding tax on
employee in social and athletic clubs and similar organizations compensation)(Sec. 33(C), NIRC).
7. Expenses for foreign travel
8. Holiday and vacation expenses
9. Educational assistance to theemployee or his dependents; and De Minimis Benefits
10. Life or health insurance and other non-life insurance premiums or similar
amounts on excess of what the lawallows(Sec. 33(B), NIRC) De Minimis Benefits are facilities and privileges furnished or offered by an
employer to his employees that are relatively small value and are offered
or furnished by the employermerely as means of promoting health,
goodwill, contentment, and efficiency of his employees.

Tax Rate and Tax Base

1. Tax base is based on the grossed-up monetary value (GMV) of fringe

benefits.
2. Rate is generally 35%, since this is the headline or the highest tax rate for The following De Minimis Benefits are exempt from income tax and
individual income taxpayers. withholding tax on compensation income of BOTH managerial and
3. FBT is calculated using the GMV multiply by the 35%(Sec. 33 (A), NIRC) rank and file EEs(exclusive enumeration):

1. Monetized unused vacation leave credits of PRIVATE employees

How GMV is determined not exceeding 10 days during the year. Note that the monetization
of unused VL credits in excess of 10 days and monetization of SL
1. GMV is determined by dividing the actual monetary value of the fringe even if not exceeding 10 days are subject to tax;
benefit by 65%(100% - tax rate of 35%).
2. For example, the actual monetary value of the fringe benefit is P1,000. 2. Monetized value of vacation and sick leave credits paid to
The GMV is equal to P1,538.46 [P1,000 / 0.65]. The fringe benefit tax, GOVERNMENT officials and employees. Note that there is no
therefore, is P538.46 [P1538.46 x 35%]. limit as to the number of credits;

Special Cases: 3. Medical cash allowance to dependents of employees, not

For fringe benefits received by non-resident alien not engaged in trade of business exceeding P1,500 per employee per semester or P250 per month;
in the Philippines (NRANETB), the tax rate is 25% of the GMV. The GMV is
determined by dividing the actual monetary value of the fringe benefit by 75% 4. Rice subsidy of P2,000 or 1 sack of 50 kg. rice per month
[100% - 25%]. amounting to not more than P2,000;

5. Uniform and Clothing allowance not exceeding P6,000 per annum;

What is the tax implication if the employer gives „fringe benefits‟ to rank-and- 6. Actual medical assistance, e.g. medical allowance to cover medical
file employees? and healthcare needs, annual medical/executive check- up,
maternity assistance, and routine consultations, not exceeding
Fringe benefits given to a rank-and-file employee are treated as part of his P10,000.00 per annum;
compensation income subject to normal tax rate and withholding tax on 7. Laundry allowance not exceeding P300 per month;
compensation income, except de minimis benefits and benefits provided for
the convenience of theemployer. 8. Employees achievement awards, e.g., for length of service or
safety achievement, which must be in the form of a tangible
personal property other than cash or gift certificate, with an annual
monetary value not exceeding P10,000 received by the employee
Payor of Fringe Benefit Tax (FBT): The employer withholds and pays the FBT under an established written plan which does not discriminate in
but the law allows him to deduct such tax from his gross income. favor ofhighly paid employees;
9. Gifts given during Christmas and major anniversary celebrations
not exceeding P5,000 per employee per annum;
10. Daily meal allowance for overtime work and night/graveyard shift
not exceeding twenty-five percent (25%) of the basic minimum
Bar: PRT Corp. purchased a residential house and lot with a swimming pool in an wage on a per region basis;
upscale subdivision and required the company president to stay there without paying
rent; it reasoned out that the company president must maintain a certain image and be 11. Benefits received by an employee by virtue of a collective
able to entertain guests at the house to promote the company's business. The company bargaining agreement (CBA) and productivity incentive schemes
president declared that because they are childless, he and his wife could very well live in provided that the total monetary value received from both CBA
a smaller house. Was there a taxable fringe benefit? (1%) (2013 Bar Question. ) and productivity incentive schemes combined
SUGGESTED ANSWER: There was a taxable fringe benefit since the stay at the house
was for free. First, the company president is not a rank-and-file employee. Thus, the If the Fringe Benefit is exempted from the FBT, the same may,
housing benefit is subject to fringe benefits tax pursuant to Section 33 of the NIRC and however, still form of the employee‘s gross compensation income
Section 2.33 (A) of the RR No. 03- 98. Although the housing benefit to the President which is subject to income tax; hence, likewise subject to
may be for the convenience of the employer (PRT Corp.) or necessary to its business, withholding tax on compensation income payment.
still, it also inured to the benefit of the President as his stay therein is for free. RR No.
03-98 also provides for the guidelines and valuation of fringe benefits for purposes of
computing Page 40 of 195 Law on Taxation the portion which shall be subject to fringe 12. do not exceed P10,000.00 per employee per taxable year.
benefits tax in cases where the fringe benefits entail joint benefits to the employer and
employee. Thus, there was a taxable fringe benefit.

4BLUE 95: All other benefits given by employers which are not included in the above
enumeration shall NOT be considered as "de minimis" benefits and hence, shall be
subject to withholding tax on compensation (rank and file employees) and FBT
(managerial/supervisory employees).

9
vi. INCOME FROM DEALINGS IN PROPERTY ( CAPITAL ASSET)

Dealings in property such as sales or exchanges may result in gain or loss. The kind of BAR: Mr. Pedro Aguirre, a resident citizen, is working for a large real estate
property involved (i.e., whether the property is a capital asset or an ordinary asset) development company in the country and in 2010, he was promoted to VicePresident of
determines the tax implication and income tax treatment, as follows: the company. With more responsibilities comes higher pay. In 2011, he decided to buy a
new car worth P2 Million and he traded-in his old car with a market value of
Taxable Ordinary Capital P800,000.00 and paid the difference of P1.2 Million to the car company. The old car,
Net = Net + Gains (other which was bought three (3) years ago by the father of Mr. Pedro Aguirre at price of
Income than those subject P700,000.00 was donated by him and registered in the name of his son. The
to Final CGT) corresponding donor‘s tax thereon was duly paid by the father. (2012 BAR)

(a) DISTINGUISH ORDINARY ASSET AND CAPITAL ASSET a. How much is the cost basis of the old car to Mr. Aguirre? Explain your answer
b. What is the nature of the old car – capital asset or ordinary asset? Explain your
Ordinary Assets Capital Assets answer.
1. Stock in trade of the taxpayer/ Property held by the taxpayer, c. Is Mr. Aguirre liable to pay income tax on the gain from the sale of his old car?
other property of a kind which whether or not connected with his Explain your answer.
would properly be included in the trade or business which is not an
inventory of the taxpayer if on ordinary asset. Suggested Answer:
hand at the close of the taxable a. P700,000. The basis of the property in the hands of the donee is the carry-over basis
year. (Sec. 40(B)(3), NIRC).
2. Property held by the taxpayer b. The old car is a capital asset. It is property held by the taxpayer, but is not stock in
primarily for sale to customers in trade of the taxpayer or other property of a kind which would properly be included in the
the ordinary course of his trade or inventory of the taxpayer if on hand at the close of the taxable year, or property Page 41
business. of 195 Law on Taxation held by the taxpayer primarily for sale to customers in the
3. Property used in the trade or ordinary course of his trade or business, or property used in the trade or business, of a
business of a character which is character which is subject to the allowance for depreciation; or real property used in
subject to the allowance for trade or business of the taxpayer (Sec. 39, NIRC).
depreciation, or c. YES. Capital gain is P100,000.
4. Real property used in the trade or
business of the taxpayer, including
property held for rent.

4BLUE 95 NOTE: in ordinary assets, that the list is EXCLUSIVE. The actual use BAR: The amount of the taxable gain is subject to the holding period of the asset (Sec.
determines whether a property is an ordinary asset or a capital asset(BIR Ruling No. DA 39,NIRC). Income from dealings in property (real, personal, or mixed) is the gain or loss
212-07, April 3, 2007). derived: (2011 Bar Question)
(A) only from the cash sales of property.
Ordinary Asset Capital Asset (B) from cash and gratuitous receipts of property.
Gain from sale, exchange, or other disposition (C) from sale and lease of property.
Ordinary Gain (part of the Gross Income) Capital Gain (D) only from the sale of property.
Loss from sale, exchange, or other disposition
SUGGESTED ANSWER: (D) only from the sale of property.
Ordinary loss (part of Allowable Capital Loss
Deductions from Gross Income)
Excess of Gains over Losses
Part of Gross Income Net Capital Gain
Excess of Losses over Gains
Part of Allowable Deductions from Gross Net Capital Loss BAR: XYZ Corporation manufactures glass panels and is almost at the point of
Income insolvency. It has no more cash and all it has are unsold glass panels. It received an
assessment from the BIR for deficiency income taxes. It wants to pay but due to lack of
cash, it seeks permission to pay in kind with glass panels. Should the BIR grant the
requested permission? (1%) (2013 Bar Question)
It should not grant permission because a tax is generally a pecuniary burden. This
(b) TYPES OF GAINS principle is one of the attributes or characteristics of tax.

Ordinary Income Vis-À-Vis Capital Gain

1. If the asset involved is classified as ordinary, the entire amount of the A law that allows taxes to be paid either in cash or in kind is valid. SUGGESTED
gain from the transaction shall be included in the computation of gross ANSWER: True. There is no law which requires the payment of taxes in cash only.
income(Sec 32(A)), and the entire amount of the loss shall be deductible However, a law allowing payment of taxes in kind, although valid, may pose
from gross income(Sec 34(D)). problems of valuation, hence, will violate the principle of administrative
2. If the asset involved is a capital asset, the rules on capital gains and losses feasibility. (BAR 2009)
apply in the determination of the amount to be included in gross income.

These rules do not apply to: BAR: Money collected from taxation shall not be paid to any religious dignitary
1. real property with a capital gains tax (final tax), or EXCEPT when: (2011 Bar Question) (A) the religious dignitary is assigned to the
2. shares of stock of a domestic corporation with a capital gains tax (final Philippine Army
tax).

Capital Gains Tax (CGT)

1. Shares of Stock in a Domestic Corporation BAR: Is the sale or transfer of bonds in the secondary market exempt from income tax?
1. Listed and Traded: Percentage Tax of 6/10 of 1% Gross Selling Price
(GSP) Suggested Answer: Yes. The 20% final withholding tax imposed on interest income or
2. NOT Listed and Traded: Final Tax of 15% of the Net Capital Gain yield from deposit substitute does not apply to the gains derived from trading,
(NCG) retirement, or redemption of the instrument. It must be stressed that interest income,
2. Real property located in the Philippines derived by individuals from long-term deposits or placements made with banks in the
1. 6% Capital Gain Tax on the presumed gain (Selling Price (SP) or Fair form of deposit substitutes, is exempt from income tax. Consequently, it is likewise
Market Value (FMV), whichever is higher) exempt from the final withholding tax under Sections 24 (B) (1) and 25 (A) (2) of the
2. XPN: sale or disposition of principal residence National Internal Revenue Code. Thus, trading gains, or gains realized from the sale or
3. Other Capital Asset transfer of bonds (i.e., those with a maturity of more than five years) in the secondary
1. Subject to ordinary income tax but with special rules. market, are exempt from income tax. These "gains" refer to the difference between the
selling price of the bonds in the secondary market and the price at which the bonds were
purchased by the seller. For discounted instruments such as the zero-coupon bonds, the
Actual Gain Vis-À-Vis Presumed Gain trading gain is the excess of the selling price over the book value or accreted value
(original issue price plus accumulated discount from the time of purchase up to the time
1. Presumed Gain: In the sale of real property located in the Philippines, of sale) of the instruments. (Banco de Oro v. Republic, G.R. No. 198756, 2016)
classified as capital asset, the tax base is the gross selling price or fair
market value, whichever is higher. The law presumes that the seller makes
a gain from such sale.
BAR: Who has the primary responsibility to withhold the 20% final withholding tax on
Thus, whether or not the seller makes a profit from the sale of real the interest earned from the Bonds?
property, he has to pay 6% capital gains tax.
Suggested Answer: The successful Government Securities Eligible Dealers-bidder, as
2. Actual Gain- The tax base in the sale of real property classified as an agent of the Bureau of Treasury, has the primary responsibility to withhold the 20% final
ordinary asset is the actual gain. withholding tax on the interest valued at present value, when its sale and distribution of
the government securities constitutes a deposit substitute transaction. The 20% final tax
is deducted by the buyer from the discount of the bonds and included in the remittance
of the purchase price. (Banco de Oro v. Republic, G.R. No. 198756, 2016)

10
(c) SPECIAL RULES PERTAINING TO INCOME OR LOSS FROM DEALINGS (d) TAX-FREE EXCHANGES(Sec. 40 (c) (2), NIRC)
IN PROPERTY CLASSIFIED AS CAPITAL ASSET
(LOSS LIMITATION RULE, LOSS CARRY-OVER RULE, HOLDING PERIOD Merger or Consolidation
RULE)
No gain or loss shall be recognized if in pursuance of a plan of merger or consolidation
1. A corporation, which is a party to a merger or consolidation, exchanges property
solely for stock in a corporation, which is a party to the merger or consolidation;
or
Long Term Capital Gain Vis-À-Vis Short Term Capital Gain 2. A shareholder exchanges stock in a corporation, which is a party to the merger or
1. Long-term capital gain- Capital asset is held for more than 12 months before it consolidation, solely for the stock of another corporation also a party to the
is sold. Only 50% of the gain is recognized. merger or consolidation; or
2. Short-term capital gain- Capital asset is held for 12 months or less, 100% of 3. A security holder of a corporation, which is a party to the merger or
the gain is subject to tax. consolidation, exchanges his securities in such corporation, solely for stock or
securities in such corporation, a party to the merger or consolidation.
4BLUE 95 NOTE: If the taxpayer is a corporation, 100% of the gain is
recognized regardless of the holding period. Both corporations in the aforementioned cases must be parties to a merger or consolidation.
Net Capital Gain Vis-À-Vis Net Capital Loss Merger occurs when one corporation acquires all or substantially all the properties of another
1. Net Capital Gain- Excess of the gains over the losses on sales or exchange of corporation. Consolidation occurs when two or more corporations merge to form one
capital assets during the taxable year. corporation.
2. Net Capital Loss- Excess of the losses over the gains on sales or exchanges of
capital assets during the taxable year.
*Initial Acquisition of Control
Income Tax Treatment of Capital Loss
No gain or loss shall also be recognized if property is transferred to a corporation by a person in
Capital loss limitation rule (applicable to both corporations and individuals) exchange for stock or unit of participation in such a corporation of which as a result of such
GR: Losses from sales or exchanges of capital assets shall be allowed only to the extent exchange said person, alone or together with others, not exceeding 4 persons, gains control of
of the gains from such sales or exchanges (Sec. 39(C), NIRC). said corporation(Lucio Co, et sl. Vs. CIR, 2020): Provided, That stocks issued for services shall
not be considered as issued in return for property.
XPN for Banks and Trust Companies: If a bank or trust company incorporated under
the laws of the Philippines, a substantial part of whose business is the receipt of deposits,
sells any bond, debenture, note, certificate or other evidence of indebtedness issued by BAR: B transferred his ownership over a 1,000- square meter commercial land and three-door
any corporation (including one issued by a government or political subdivision thereof) apartment to ABC Corp., a family corporation of which B is a stockholder. The transfer was in
with interest coupons or in registered form, any loss resulting from such sale shall not be exchange of 10,000 shares of stock of ABC Corp. As a result, B acquired 51% ownership of
subject to the foregoing limitation and shall not be included in determining the ABC Corp., with all the shares of stock having the right to vote. B paid no tax on the exchange,
applicability of such limitation to other losses(Sec. 39(C), NIRC). maintaining that it is a tax avoidance scheme allowed under the law. The Bureau of Internal
Revenue, on the other hand, insisted that B's alleged scheme amounted to tax evasion. Should B
Net loss carry-over rule (applicable only to individuals) pay taxes on the exchange? Explain. (2019 BAR)
If an individual sustains in any taxable year a net capital loss, such loss (in an amount not A: NO, B shall not pay taxes on the exchange. Section 40(C)(2) of the Tax Code provides that
in excess of the net income for the year) shall be treated in the succeeding taxable year as no gain or loss shall be recognized if property is transferred to a corporation by a person in
a loss from the sale or exchange of a capital asset held for not more than 12 months(Sec. exchange for stocks in such corporation wherein as a result of such exchange, such person,
39(D), NIRC). alone or together with others, not exceeding four, gains control of the corporation. When B
Net operating loss (NOL) is the excess of allowable deductions over gross income for any transferred the properties for shares in ABC Corporation, he acquired control (51% of voting
taxable year immediately preceding the current taxable year. shares) over the corporation, thus, the transaction shall not be subject to income tax, capital
gains tax, and value added tax.
NOLCO- The NOL of the business or enterprise which had not been previously offset as
deduction from gross income shall be carried over as a deduction from gross income for
the next 3 consecutive taxable years immediately following the year of such loss,
provided however, that any net loss incurred in a taxable year during which the taxpayer
was exempt from income tax shall not be allowed as a deduction(Sec. 34(3)(D), NIRC)

Requisites for NOLCO

1. The taxpayer was not exempt from income tax the year the loss BAR: In 2001, A, with the assistance of its financial advisors, B Bank et al, requested an
was incurred; approval for the issuance of Bureau of Treasury of 10-yaer zero-coupon Treasury
2. There has been no substantial change in the ownership of the Certificates (T-notes). The T-notes would be purchased for a special purpose on behalf
business or enterprise wherein: of A, repackaged and sold at a premium to investors as the PEACE Bonds and the net
3. AT LEAST 75% of nominal value of outstanding issued shares is proceeds from the sale of the bonds will be used to endow a permanent fund (the
held by or on behalf of the same persons; or Hanapbuhay Fund) to finance activities of NGOs in the country. Bureau of Treasury
4. AT LEAST 75% of the paid up capital of the corporation is held issued the Auction Guidelines which provides that the Bonds to be auctioned are not
by or on behalf of the same persons. subject to 20% withholding tax as the issue will be limited to a maximum of 19 lenders
in the primary market based on the 2001 BIR Ruling. B Bank was appointed as the Issue
Taxpayers Entitled to NOLCO
Manager and Lead Underwriter for the offering of the PEACE Bonds. However, BIR
Individuals engaged in trade or business or in the exercise of his profession (including
estates and trusts); issued 2 conflicting BIR Rulings in 2011, (1) declaring the PEACe Bonds, being deposit
substitutes, were subject to 20% final withholding tax, and the Bureau of Treasury shall
2023 NOTE: An individual who avails of 40% Optional Standard Deduction (OSD) shall withhold 20% final tax from the face value of the PEACe Bonds, (2) clarifying that the
NOT simultaneously claim deduction of NOLCO. However, the 3-year reglementary final withholding tax due on the discount or interest earned on the PEACe Bonds should
period shall continue to run during such period notwithstanding the fact that the ―be imposed and withheld not only on the primary holders (A and B Bank) but also on
aforesaid taxpayer availed of OSD during the said period. all subsequent holders of the Bonds.
What is the proper interpretation of the 20-lender rule under Section22 (Y) of NIRC,
Domestic and resident foreign corporations subject to the normal income tax or particularly in relation to issuance of government debt instruments
preferential tax rates under the Code (e.g., private educational institutions, hospitals, and
regional operating headquarters) or under special laws (e.g., PEZA-registered Suggested Answer: The definition of deposit substitutes in Section 22 (Y) specifically
companies) defined "public" to mean "twenty (20) or more individual or corporate lenders at any one
time." The qualifying phrase for public introduced by the National Internal Revenue
NOTE: Domestic and resident foreign corporations taxed during the taxable year with
Minimum CorporateIncome Tax (MCIT) cannot enjoy the benefit of NOLCO. However, Code shows that a change in the meaning of the provision was intended, and this Court
the 3-year period for the expiry of the NOLCO is not interrupted by the fact that the should construe the provision as to give effect to the amendment. Hence, in light of
corporation is subject to MCIT during such three-year period. Section 22 (Y), the reckoning of whether there are 20 or more individuals or corporate
lenders is crucial in determining the tax treatment of the yield from the debt instrument.
In other words, if there are 20 or more lenders, the debt instrument is considered a
deposit substitute and subject to 20% final withholding tax. (Banco de Oro v. Republic,
G.R. No. 198756, 2016)
BAR: In March 2009, Tonette, who is fond of jewelries, bought a diamond ring for
P750,000.00, a bracelet for P250,000.00, a necklace for P500,000.00, and a brooch for
P500,000.00. Tonette derives income from the exercise of her profession as a licensed CPA. In
October 2009, Tonette sold her diamond ring, bracelet, and necklace for only P1.25 million
incurring a loss of P250,000.00. She used the P1.25 million to buy a solo diamond ring in BAR: Keyrand sold the shares for P2 million and realized a net gain of P200,000.00. How shall
November 2009 which she sold for P1.5 million in September 2010. Tonette had no other it pay tax on the transaction? (2011 Bar Question)
transaction in jewelry in 2010. Which among the following describes the tax implications SUGGESTED ANSWER: It shall pay a tax of one-half of 1% of the P2 million gross sales.
arising from the above transactions? (2011 Bar Question)
SUGGESTED ANSWER: Tonette may carry over and deduct her 2009 loss only from her 2010
gain.‖ 7. Dealings in real property situated in the Philippines 8. Dealings in shares of stock of
Philippine corporations a. Shares listed and traded in the stock exchange b. Shares not listed and BAR: In 2006, Mr. Vicente Tagle, a retiree, bought 10,000 CDA shares that are unlisted in the
traded in the stock exchange‖ local stock exchange for P10 per share. In 2010, the said shares had a book value per share of
P60 per share. In view of a car accident in 2010, Mr. Vicente Tagle had to sell his CDA shares
but he could sell the same only for P50 per share. The sale is subject to tax as follows: (2012
BAR)
BAR: Federico, a Filipino citizen, migrated to the United States some six years ago and got a SUGGESTED ANSWER: c) 5%/10% capital gains tax on the capital gain from sale of P40 per
permanent resident status or green card. He should pay his Philippine income taxes on: (2011 share (P50 selling price less P10 cost) plus donor‘s tax on the excess of the fair market value of
Bar Question). the shares over the consideration Section 24(C) in relation to Section 100, NIRC; RR No. 6-
SUGGESTED ANSWER: the gains derived from the sale in the New York Stock Exchange of 2008.
shares of stock in PLDT, a Philippine corporation. Page 44 of 195 Law on Taxation Keyrand,
Inc., a Philippine corporation, sold through the local stock exchange 10,000 PLDT shares that it
bought 2 years ago.

11
viii. PROFESSIONAL INCOME BAR: BBB, Inc., a domestic corporation, enjoyed a particularly profitable year in 2014.
In June 2015, its Board of Directors approved the distribution of cash dividend to its
Refers to fees received by a professional from the practice of his profession, stockholders. BBB, Inc. has individual and corporate stockholders. What is the tax
provided that there is NO employer-employee relationship between him and his treatment of the cash dividends received from BBB, Inc. by the following stockholders:
clients.
1. A resident citizen A: A final withholding tax for ten percent (10%) shall be
It includes the fees derived from engaging in an endeavor requiring special training imposed upon the cash dividends actually or constructively received by a resident
as professional as means of livelihood, which includes, but is not limited to, the citizen from BBB, Inc. (Sec. 24(B)(2), NIRC)
fees of CPAs, doctors, lawyers, engineers, and the like.
The existence of employee-employer relationship is the distinguishing factor 2. Non-resident alien engaged in trade or business A: A final withholding tax of
between compensation income versus professional income. twenty percent (20%) shall be imposed upon the cash dividends actually or
constructively received by a non-resident alien engaged in trade or business from
BBB, Inc. (Sec. 25(A)(2),NIRC)

ix. INCOME FROM BUSINESS 3. Non-resident alien not engaged in trade or business A: A final withholding tax
equal to twentyfive percent (25%) of the entire income received from all sources
Any income derived from doing business. within the Philippines, including the cash dividends received from BBB, Inc. (Sec.
25(B), NIRC)
Doing business: The term implies a continuity of commercial dealings and
arrangements, and contemplates, to that extent, the performance of acts or works or 4. Domestic corporation A: Dividends received by a domestic corporation from
the exercise of some of the functions normally incident to, and in progressive another domestic corporation, such as BBB, Inc., shall not be subject to tax (Sec.
prosecution of, the purpose and object of its organization. 27(D)(4), NIRC)

5. Non-resident foreign corporation (2015 BAR) A: Dividends received by a non-

BAR: In 2000, Mr. Belen bought a residential house and lot for P1,000,000. He resident foreign corporation from a domestic corporation are generally subject to
used the property as his and his family's principal residence. It is now year 2013 an income tax of 30% to be withheld at source. (Sec. 28(B)(1), NIRC) However, a
and he is thinking of selling the property to buy a new one. He seeks your advice final withholding tax of fifteen percent (15%) is imposed on the amount of cash
on how much income tax he would pay if he sells the property. The total zonal dividends received from a domestic corporation like BBB, Inc. if the tax sparing
value of Page 45 of 195 Law on Taxation the property isP5,000,000 and the fair rule applies. (Sec. 28(B)(5)(b), NIRC) Pursuant to this rule, the lower rate of tax
market value per the tax declaration is P2,500,000. He intends to sell it for would apply if the country in which the non- resident foreign corporation is
P6,000,000. What material considerations will you take into account in computing domiciled would allow as tax credit against the tax due from it, taxes deemed paid
the income tax? Please explain the legal relevance of each of these considerations. in the Philippines of 15% representing the difference between the regular income
(2013 Bar Question) tax rate and the preferential rate.
SUGGESTED ANSWER: In computing the capital gains tax, a final tax of six
percent (6%) based on the gross selling price or current fair market value, 4BLUE 95 NOTE: Starting July 1, 2020, the income tax rate for non-resident
whichever is higher, shall be imposed. In this case, the basis of the tax is foreign corporations is 25%. (Sec. 28(B)(1), as amended by R.A. No. 11534 –
P6,000,000.00, the gross selling price, being higher than P2,500,00.00, the fair CREATE Act) (CREATE Act is not covered by 2020 bar syllabus)
market value of the residential house. Nevertheless, if within thirty (30) days from
the date of sale or disposition, Mr. Belen notifies the Commissioner that he intends
to utilize the whole P6,000,000.00 in acquiring a new house within eighteen (18)
calendar months from the sale, the gross selling price shall be exempt from the
capital gains tax. BAR: The Bureau of Treasury (BoT) issued P35 billion worth of 10-year zero-coupon
If Mr. Belen does not utilize the whole P6,000,000.00 in acquiring a new residence treasury bonds (PEACe Bonds) to A Corp at P10.2 billion. Then, A Corp (as
under the conditions above, the portion of the gain presumed to have been realized underwriter) on behalf of B Corp sold and distributed the PEACe Bonds to undisclosed
from the sale or disposition shall be subject to capital gains tax. For this purpose, investors. The CIR issued a ruling declaring that the PEACe bonds being deposit
P6,000,000.00 shall be multiplied by a fraction which the unutilized amount bears substitutes are subject to the 20% final withholding tax. Thus, the Bo withheld 20% final
to the gross selling price in order to determine the taxable portion and the 6% tax from the face value of the PEACe Bonds. Petitioners contend that there is only one
capital gains tax shall be imposed thereon under Section 24(D) of the NIRC. lender to whom the BTr issued the government bonds. Respondents theorize that the
word ―any‖ indicates that the period contemplated is the entire term of the bond and not
merely the point of origination or issuance such that if the debt instruments ―were
BAR: Mr. H decided to sell the house and lot wherein he and his family have lived subsequently sold in secondary markets and so on, in such a way that 20 or more buyers
for the past 10 years, hoping to buy and move to a new house and lot closer to his eventually own the instruments, then it becomes indubitable that funds would be
children's school. Concerned about the capital gains tax that will be due on the sale obtained from the ―public.‖ Are PEACe Bonds considered as ―deposit substitutes‖ and
of their house, Mr. H approaches you as a friend for advice if it is possible for the thus subject to 20% final withholding tax?
sale of their house to be exempted from capital gains tax and the conditions they
must comply with to avail themselves of said exemption. How will you respond? Suggested Answer: No. Under the 1997 National Internal Revenue Code, a final
(2015 Bar Question) withholding tax at the rate of 20% is imposed on interest on any currency bank deposit
and yield or any other monetary benefit from deposit substitutes and from trust funds
SUGGESTED ANSWER: Mr. H may avail the exemption from capital gains tax and similar arrangements. Congress specifically defined "public" to mean "twenty (20)
on sale of principal residence by natural persons. Under the law, the following are or more individual or corporate lenders at any one time." Hence, the number of lenders
the requisites: (1) proceeds of the sale of the principal residence have been fully is determinative of whether a debt instrument should be considered a deposit substitute
utilized in acquiring or constructing new principal residence within eighteen (18) and consequently subject to the 20% final withholding tax. From the point of view of the
calendar months from the date of sale or disposition; financial market, the phrase ―at any one time‖ for purposes of determining the ―20 or
(2) The historical cost or adjusted basis of the real property sold or disposed will be more lenders‖ would mean every transaction executed in the primary OR secondary
carried over to the new principal residence built or acquired; market in connection with the purchase or sale of securities. In this case, the BIR
(3) The Commissioner has been duly notified, through a prescribed return, within asserted that government securities are always deposit substitutes irrespective of the
thirty (30) days from the date of sale or disposition of the person‘s intention to number of lenders, but the SC ruled that government securities must comply with the
avail of the tax exemption; and (4) Exemption was availed only once every ten (10) ―20 or more‖ rule. Petitioners argued that the ―20 or more‖ rule is relevant only at the
years point of origination (i.e., issuance), but the SC said that the ―20 or more‖ rule is relevant
―at any one time‖. In the end, the SC held that the PEACe Bonds are not subject to the
20% FWT, not because they are not deposit substitutes, but because at the moment it
cannot be determined as to how many investors the PEACe Bonds were sold to by A
Corp. (Banco De Oro v Republic, G.R. No. 198756, 2015.)

12
vii. PASSIVE INVESTMENT INCOME

Under Sec 24(B) of the Tax Code, a final tax is imposed upon gross passive income of BAR: Mr. Javier is a non-resident senior citizen. He receives a monthly pension from the GSIS
citizen and resident aliens. An income is considered passive if the taxpayer merely which he deposits with the PNB-Makati Branch. Is he exempt from income tax and therefore
waits for it to be realized. not required to file an income tax return? (2000 BAR) A: Mr. Javier is exempt from income tax
on his monthly GSIS pension (Sec. 32(B)(6)(f), NIRC) but not on the interest income that might
accrue on the pensions deposited with PNB which are subject to final withholding tax.
Consequently, since Mr. Javier‘s sole taxable income would have been subjected to a final
withholding tax, he is not required anymore to file an income tax return. (Sec. 51(A)(2)(c),
SOURCES NIRC)

4BLUE 95 NOTE: these sources of income are NOT added to other income in the BAR: What are disguised dividends in income taxation? Give an example. (1994 BAR) A:
determination of ordinary income tax liability. Disguised dividends are those income payments made by a domestic corporation, which is a
subsidiary of a non-resident foreign corporation, to the latter ostensibly for services rendered by
Passive income is only subject to final tax if the source is within the Philippines. the latter to the former, but which payments are disproportionately larger than the actual value
of the services rendered. In such case, the amount over and above the true value of the service
rendered shall be treated as a dividend and shall be subjected to the corresponding tax on
Philippine sourced gross income, or such other preferential rate as may be provided under a
(a) INTEREST (final tax) corresponding Tax Treaty.
Example: Royalty payments under a corresponding licensing agreement.
An earning derived from depositing or lending of money, goods ,or credits.
BAR: Spouses Konstantino and Karina are Filipino citizens and are principal shareholders of a
restaurant chain, Karina's, Inc. The restaurant's principal office is in Makati City, Philippines.
Interest Income Korina's became so popular as a Filipino restaurant that the owners decided to expand its
1. Interest from any currency bank deposit- 20% final tax operations overseas. During the period 2010-2015 alone, it opened ten (10) stores throughout
2. Interest income received by an individual taxpayer (except non-resident North America and five (5) stores in various parts of Europe where there were large Filipino
individual) from depositary bank under the Expanded Foreign Currency Deposit communities. Each store abroad was in the name of a corporation organized under the laws of
System (EFCDS)- 15% final tax the state or country in which the store was located. All stores had identical capital structures:
60% of the outstanding capital stock was owned by Karina's, Inc., while the remaining 40% was
3. Interest income from long term deposit or investment- EXEMPT from tax, except
owned directly by the spouses Konstantino and Korina. Beginning 2017, in light of the
in cases of pre-termination
immigration policy enunciated by US President Donald Trump, many Filipinos have since
returned to the Philippines and the number of Filipino immigrants in the US dropped
significantly. On account of these developments, Konstantino and Karina decided to sell their
shares of stock in the five (5) US corporations that were doing poorly in gross sales. The
spouses' lawyer-friend advised them that they will be taxed 5% on the first PhP100,000 net
capital gain, and 10% on the net capital gain in excess of P 100,000. Is the lawyer correct? If
not, how should the spouses Konstantino and Karina be taxed on the sale of their shares? (2018
(b) ROYALTY INCOME BAR)
A: The lawyer‘s advice is wrong. The capital gains tax of 5% for the first P 100,000 net capital
Where a person pays royalty to another for the use of its intellectual property, such gain, and 10% on the net capital gain in excess of P100,000 applies only to the net capital gains
realized from the sale, barter, exchange or other disposition of shares of stock in a domestic
royalty is generally a passive income of the owner thereof subject to withholding tax.
corporation. (Sec. 24(C), NIRC) Since the shares of stock sold are shares of foreign
corporations held as capital assets, the recognized portion of the capital gain realized from the
sale must be reported as part of their gross income in their income tax returns where the taxable
1. Subject to the Ordinary Income Tax at the rate prescribed for individuals and income will be subject to the graduated income tax rates for individuals. (Sec. 24(A)(1)(a) in
corporation if it is an active income. relation to Sec. 39, NIRC) [NOTE: Starting January 1, 2018, a final tax rate of 15% is imposed
2. Subject to Final Withholding Tax if it is a passive income. upon the net capital gains realized during the taxable year from the sale, barter, exchange, or
other disposition of shares of stock in a domestic corporation, except shares sold, or disposed of
through the stock exchange. (Sec. 24(C), NIRC as amended by R.A. No. 10963 – TRAIN Law)]

(c) RENTAL INCOME

Refers to earnings derived from leasing real estate as well as personal property. Aside
from the regular amount of payment for using the property, it also includes all other
obligationsassumed to be paid by the lessee to the third party in behalf of the lessor (e.g.,
interest, taxes, loans, insurance premiums, etc.)

BAR: In June 2013, DDD Corp., a domestic corporation engaged in the business of
leasing real properties in the Philippines, entered into a lease agreement of a residential
house and lot with EEE, Inc., a non-resident foreign corporation. The residential house
and lot will be used by officials of EEE, Inc. during their visit to the Philippines. The
lease agreement was signed by representatives from DDD Corp. and EEE, Inc. in
Singapore. DDD Corp. did not subject the said lease to VAT believing that it was not a
domestic service contract. Was DDD Corp. correct? Explain. (2015 Bar Question)
SUGGESTED ANSWER: DDD Corp. is not correct. Any person who, in the ordinary
course of trade or business, leases properties, whether personal or real, shall be subject
to value-added tax (VAT), except for unless the gross annual receipts of the lessor do
not exceed P1,919,500.00 Page 48 of 195 Law on Taxation or that the monthly rental
does not exceed P12,800, for residential units. Based on the destination principle, goods
and services are taxed only in the country where they are consumed. Here , the services
rendered to the officials of EEE are within the Philippines. Hence, DDD Corp. is subject
to VAT.

BAR: During the audit conducted by the BIR official, it was found that the rental
income claimed by the corporation was not subjected to expanded withholding tax.
Accordingly, the claimed rental expense: (2012 BAR) a) Is deductible from the gross
income of the corporation, despite nonwithholding of income tax by the corporation; b)
Is deductible from the gross income of the corporation, provided that the 5% expanded
withholding tax is paid by the corporation during the audit; c) Is not deductible from
gross income of the corporation due to non-withholding of tax; d) Is deductible, if it can
be shown that the lessor has correctly reported the rental income in his tax return.
SUGGESTED ANSWER: c) Is not deductible from gross income of the corporation due
to non-withholding of tax; Section 34(K), NIRC. [Note: Percentage tax is outside of the
coverage]

13
(d) DIVIDEND

A form of earnings derived from the distribution made by a corporation out of its BAR: ABC Corp. was dissolved and liquidating dividends were declared and paid to the
earnings orprofits and payable to its stockholders, whether in money or in property. stockholders. What tax consequence follows? (1%) (2013 Bar Question)
(A) ABC Corp. should deduct a final tax of 10% from the dividends.
The following are the classification of dividends: (B) The stockholders should declare their gain from their investment and pay income tax
1. Cash dividends at the ordinary rates.
2. Stock dividends (C) The dividends are exempt from tax.
3. Property dividends; and (D) ABC Corp. should withhold a 10% creditable tax.
4. Liquidating dividends.
SUGGESTED ANSWER: (C) The dividends are exempt from tax. Liquidating
dividends are not income and are thus not subject to income tax. In Wise & Co., Inc. v.
Cash and Property Dividend From Domestic Corporation Meer (G.R. No. 48231, June 30, 1947), the Supreme Court defined liquidating dividends
1. 10% Final Tax (Citizen or RA) as the dissolving corporation‘s payments to the stockholders for their surrender and
2. 20% Final Tax (NRAETB) relinquishment of interest in the dissolving corporation. They are generally a return of
3. 25% Gross Income Tax (NRANETB) capital. Liquidating dividends are unlike cash and property dividends which are portions
4. EXEMPT (Inter-Corporate Dividend by DC and RFC) of corporate profits that are set aside for distribution to the stockholders in proportion to
5. Tax Sparing Rule (NRFC) their subscription to the capital stock of the corporation.
1. Dividends from DC received by NRFC is subject 15% Final Tax, subject
to the condition that the country in which the NRFC is domiciled allows a
credit on taxes deemed to have been paid in the Philippines
2. Otherwise, 30% BAR: MGC Corp. secured an income tax holiday for 5 years as a pioneer industry. On
Cash and Property Dividend from Foreign Corporation the fourth year of the tax holiday, MGC Corp. declared and paid cash dividends to its
1. Part of the Gross Income and thus subject to the graduated tax rates if received by stockholders, all of whom are individuals. Are the dividends taxable? (1%) (2013 Bar
RESIDENT CITIZEN, (Sec. 24, 25A1) Question) (A) The dividends are taxable; the tax exemption of MGC Corp. does not
2. Part of the GI and thus subject to 30%income tax if receivedby a DOMESTIC extend to its stockholders. (B) The dividends are tax exempt because of MGC Corp.'s
CORPORATION (Sec. 32A) income tax holiday. (C) The dividends are taxable if they exceed 50% of MGC Corp.'s
3. Not taxable if received by NRC, RA, NRA, RFC and NRFC retained earnings. (D) The dividends are exempt if paid before the end of MGC Corp.'s
Stock Dividend fiscal year.
GR: stock dividend is not subject to tax because it does not constitute income (Sec.
73B, 1997 NIRC). SUGGESTED ANSWER: (A) The dividends are taxable; the tax exemption of MGC
XPN: if a corporation cancels or redeems stock dividend at such time and in such Corp. does not extend to its stockholders. MGC Corp. and its stockholders are separate
manner as to make the distribution and cancellation or redemption essentially equivalent tax entities under the NIRC. Consequently, MGC Corp.‘s tax exemption does not extend
to the distribution of a taxable dividend. to its stockholders. Under the NIRC, stockholders who receive dividends from a
domestic corporation are subject to the following scheduler income tax rates: 10% for
Liquidating Dividends
Filipino citizens and individual resident aliens; 20% for non-resident aliens engaged in
1. Gain realized or loss sustained is taxable income or deductible loss(Sec. 73(A),
trade or business; and 15% for non-resident foreign corporations. Thus, the
NIRC)
stockholder‘s claim for the tax exemption is unmeritorious.
2. Any gain or loss on the part of the stockholder is subject to tax, while on the part of
the liquidating corporation, no tax is imposed on its receipt of the shares surrendered or
transfer of assets to the stockholder because said transaction is not treated as a sale.

Cash dividends

Dividends are subject to final tax under the NIRC. However, dividends received by a
domestic corporation from another domestic corporation, and a non-resident foreign
corporation from a domestic corporation is EXEMPT from income tax.

Stock dividends

Stock dividend is generally EXEMPT from income tax, except:

1. If a corporation cancels or redeems stockissues as dividend xxx the

amount so distributed in redemption or cancellation of the stock shall be
considered as taxable income to the extent that it represents a distribution
of earnings or profits (Sec. 73(B), NIRC); or

2. Where there is an option that some stockholders could take cash or

property dividends instead of stock dividends; some stockholders
exercised the option to take cash of property dividends; and the exercise of
option resulted in a change of the stockholders‘ proportionate share in the
outstanding share of the corporation.

Property dividends

Property dividends are subject to tax at the preferential rate under the NIRC.

Liquidating dividends

Represents distribution of all the property or assets of a corporation in complete

liquidation or dissolution. It is strictly NOT dividend income, but rather is treated in
effect, a return of capital to the extent of the shareholder‘s investment.

The difference between the cost or other basis of the stock and the amount received in
liquidation of the stock is a capital gain or a capital loss. Where property is distributed in
liquidation, the amount received is the FMV of such property. The income is subject to
ordinary income tax rates. It is subject neither to the FWT on dividends nor to the
CGT on sale of shares.

14
x. INCOME FROM ANY SOURCE

i. RATIONALE
Inclusion of all income not expressly exempted within the class of taxable income under
the laws irrespective of the voluntary or involuntary action of the taxpayer in producing The term ―exclusions‖ refers to items that are not included in the determination of gross
the gains, and whether derived from legal or illegal sources. income because:
1. They represent return of capital or are not income, gain, or profit;
2. They are subject to another kind of internal revenue tax;
3. They are income, gain, or profit expressly exempt from income tax under
(a) CONDONATION OF INDEBTEDNESS
the Constitution, tax treaty, Tax Code, or a general or special law.
The cancellation of indebtedness may have any of 3 possible consequences:
1. It may amount to payment of income. If, for example, an individual performs
services to or for a creditor, who, in consideration thereof, cancels the debt,
income in that amount is realized by the debtor as compensation for personal
services.
2. It may amount to a gift. If a creditor wishes merely to benefit the debtor, and ii. TAXPAYERS WHO MAY AVAIL
without any consideration therefore, cancels the debt, the amount of the debt is a
gift to the debtor and need not be included in the latter‘s report of income. Exclusion Taxpayer
3. It may amount to a capital transaction. If a corporation to which a stockholder is
Return of Capital All taxpayers since there is no income
indebted forgives the debt, the transaction has the effect of a payment of
dividend. Already subject to internal revenue tax All taxpayers unless provided that income
is to be included
Express exclusion As expressly provided
(b) RECOVERY OF ACCOUNTS PREVIOUSLY WRITTEN OFF
iii. *DISTINGUISH: EXCLUSIONS, DEDUCTIONS, AND TAX CREDITS
Bad debts claimed as a deduction in the preceding year(s) but subsequently recovered shall be
included as part of the taxpayer‟s gross income in the year of such recovery to the extent of Exclusions from gross income refer to flow of wealth to the taxpayer which are
the income tax benefit of said deduction. There is an income tax benefit when the deduction of not treated as part of gross income for purposes of computing the taxpayer‘s
the bad debt in the prior year resulted in lesser income and hence tax savings for the company taxable income, due to the following reasons:
(Sec. 4, RR 5-99).
1. it is exempted by the Constitution or a statute; or
2. it does not come within the definition of income.
(c) RECEIPT OF TAX REFUNDS OR CREDIT
Deductions, on the other hand, are the amounts which the law allows to be
GR: A refund of a tax related to the business or the practice of profession, is taxable income subtracted from gross income in order to arrive at net income.
(e.g., refund of fringe benefit tax) in the year of receipt to the extent of the income tax benefit of
said deduction. Exclusions pertain to the computation of gross income, while deductions
XPNs: However, the following tax refunds are NOT to be included in the computation of gross pertain to the computation of net income.
income:
1. Philippine income tax, except the fringebenefit tax Exclusions are something received or earned by the taxpayer which do not form
2. Income tax imposed by authority of anyforeign country, if the taxpayer claimed a part of gross income while deductions are something spent or paid in earning
credit for such tax in the year it was paid or incurred. gross income.
3. Estate and donor‘s taxes
4. Taxes assessed against local benefits of akind tending to increase the value of
theproperty assessed (Special assessments) Tax Credit refers to amounts subtracted from the computed tax in order to
5. Value Added Tax arrive at taxes payable.
6. Fines and penalties due to late payment oftax
7. Final taxes
8. Capital Gains Tax

2023 NOTE: The enumeration of tax refunds that are not taxable (income) is derived from an
enumeration of tax payments that are not deductible from gross income.

If a tax is not an allowable deduction from gross income when paid (no reduction of taxable EXCLUSIONS UNDER THE CONSTITUTION
income, hence no tax benefit), the refund is not taxable.
Income derived by the government or its political subdivisions from the exercise of
any essential governmental function.

Also, all assets and revenues of a non-stock, non-profit private educational

institution used directly, actually ,and exclusively for private educational purposes
EXCLUSION shall be exempt from taxation.

Exclusions from gross income refer to income received or earned but is NOT taxable
as income because it is exempted by law or by treaty. Such tax-free income is not to be
included in the income tax return unless information regarding it is specifically called
for. Receipts which are not in fact income are, of course, excluded from gross income.

The exclusion of income should not be confused with the reduction of gross income
by the application of allowable deductions. While exclusions are simply not taken into
account in determining gross income, deductions are subtracted from gross income to
arrive at net income.

Items of Exclusions representing return of capital

Amount of capital is generally recovered through deduction of the cost or adjusted basis
of the property sold from the gross selling price or consideration, or through the
deduction from gross income of depreciation relating to the property used in trade or
business before it is sold.

It may also relate to indemnities, such as proceeds of life insurance paid to the insured‘s
beneficiaries and return of premiums paid by the insurance company to the insured
under a life insurance, endowment or annuity contract.

Damages, in certain instances, may also be exempt because they represent return of
capital.

Items of Exclusion because it is subject to another internal revenue tax

The value of property acquired by gift, bequest, devise, or descent is exempt from
income tax on the part of the recipient because the receipt of such property is already
subject to transfer taxes (estate tax or donor‘s tax).

Items of Exclusions because they are expressly exempt from income tax

1. Under the Constitution

2. Under a tax treaty
3. Under special laws

15
EXCLUSIONS UNDER THE TAX CODE

1. Proceeds of life insurance policies 7. Retirement benefits, pensions, gratuities, etc.

These are:
The proceeds of life insurance policies paid to his estate or to any a. Retirement benefits
beneficiary (but not a transferee for a valuable consideration), directly or
in trust, upon the death of the insured, are excluded from the gross income 4BLUE 95: Retirement benefits received under RA 7641(The Retirement
of the beneficiary. Pay Law) and those received by officials and employees of private firms
under a reasonable private benefit plan (RPBP) maintained by the
employer under RA 4917 (now Section 32(B)(6)(a) of NIRC) are excluded
However, if such amounts are held by the insurer under an agreement to from gross income subject to income tax.
pay interest thereon, the interest payments received by the insured shall
be included in gross income.The interest income shall be taxed at the BAR: Under what conditions are retirement benefits received by officials
graduated income tax rates. and employees of private firms excluded from gross income and exempt
from taxation? (2000 BAR)
2. Return of premium paid A: Retirement benefits received under R.A. No. 7641 and those received by
GR: The amount received by the insured as a return of premiums paid by officials and employees of private firms, whether, individual or corporate,
him under life insurance, endowment, or annuity contracts, either during in accordance with the employer‘s reasonable private benefit plan approved
the term or at the maturity of the term mentioned in the contract or upon by the BIR, are excluded from gross income and exempt from income
surrender of the contract is a return of capital and not income. taxation if the retiring official or employee was: 1. In service of same
employer for at least 10 years; 2. Not less than fifty years of age at time of
retirement; 3. Availed of the benefit of exclusion only once; (Sec.
This refers to the cash surrender value of the contract.
32(B)(6)(a), NIRC) 4. The retiring official or employee should not have
previously availed of the privilege under the retirement plan of the same or
XPN: If the amounts received by the insured (when added to the amounts another employer. (Sec. 2.78(B)(1), 1st par. RR No. 02-98)
already received before the taxable year under such contract) exceed the
aggregate premiums or considerations paid (whether or not paid during the b. Terminal pay
taxable year), then the excess shall be included in gross income. c. Retirement Benefits from foreigngovernment agencies
d. Veterans benefits
e. Benefits under the Social Security Act
3. Amounts received under life insurance, endowment, or annuity f. GSIS benefits
contracts

Amounts received (other than amounts paid by reason of the death of the Involuntary Separation- separation of the employee must not be asked for, initiated by
him or of his own making or choice (Section 32(B)(6)(b), NIRC).
insured and interest payments on such amounts) under a life insurance,
endowment, or annuity contracts are excluded from gross income, but if BAR: The Board of Directors of Sumo Corporation, a company primarily engaged in the
such amounts (when added to amounts already received before the taxable business of marketing and distributing pest control products, approved the partial
year under such contract) exceed the aggregate premiums of cessation of its commercial operations, resulting in the separation of 32 regular
considerations paid (whether or not paid during the taxable year), then the employees. Only half of the affected employees were notified of the board resolution.
excess shall be included in gross income. However, in the case of a Rule on the taxability of the separation pay and indemnity that will be received by the
transfer for valuable consideration, by assignment or otherwise, of a life affected employees as the result of their separation from service. Explain your answer.
insurance, endowment, or annuity contract, or any interest therein, only the (3%) (2017 BAR) a:It shall be tax-exempt. Section 32(B)(6)(b) of the NIRC, provides
actual value of such consideration and the amount of the premiums and that any amount received by an official or employee or by his heirs from the employer as
other sums subsequently paid by the transferee are exempt from taxation. a consequence of separation of such official or employee from the service of the employer
because of death, sickness or other physical disability or for any cause beyond the control
of the said official or employee shall be exempt from taxation.

BAR: Z is a Filipino immigrant living in the United States for more than 10 years. He is
4. Value of property acquired by gift, bequest, devise or descent retired and he came back to the Philippines as a balikbayan. Every time he comes to the
Gifts, bequests, and devises (which are subject to estate or gift taxes) are Philippines, he stays here for about a month. He regularly receives a pension from his
excluded from gross income, BUT not the income from such property. If former employer in the United States, amounting to US$1,000 a month. While in the
the amount received is on account of services rendered, whether Philippines, with his pension pay from his former employer, he purchased three
constituting a demandable debt or not, or the use or opportunity to use of condominium units in Makati which he is renting out for P15, 000 a month each. (a) Does
capital, the receipt is income. the US$ 1,000 pension become taxable because he is now residing in the Philippines?
Reason briefly. xxx (2007 BAR) A: NO. The provisions of any existing law to the
BAR: Mr. Rodrigo, an 80-year-old retired businessman, fell in love with contrary notwithstanding, social security benefits, retirement gratuities, pensions and
20-year-old Tetchie Sonora, a night club hospitality girl. Although she other similar benefits received by a resident citizen of the Philippines, such as Z, from a
refused to marry him, she agreed to be his ―live-in" partner. In gratitude foreign private institution, is excluded from income taxation. (Sec. 32(B)(6)(c), NIRC)
Mr. Rodrigo transferred to her a condominium unit, where they both live,
BAR: X, an employee of ABC Corporation died. ABC Corporation gave X‘s widow an
under a deed of sale for P10 million. Mr. Rodrigo paid the capital gains tax
amount equivalent to X‘s salary for one year. Is the amount considered taxable income to
of 5% of P10 million. The Commissioner of Internal Revenue found that the widow? Why? (1996 BAR) A: NO. The amount received by the widow from the
the property was transferred to Tetchie Sonora by Mr. Rodrigo because of decedent‘s employer may either be a gift or a separation benefit on account of death. Both
the companionship she was providing him. Accordingly, the are exclusions from gross income pursuant to provisions of Section 32(B)(6)(b) of the
Commissioner made a determination that Sonora had compensation NIRC, as amended by R.A. No. 8424 (the Tax Reform Act of 1997).
income of P10 million in the year the condominium unit was transferred to
her and issued a deficiency income tax assessment. Tetchie Sonora BAR: A, an employee of the Court of Appeals, retired upon reaching the compulsory age
protests the assessment and claims that the transfer of the condominium of 65 years. Upon compulsory retirement, A received the money value of his accumulated
unit was a gift and therefore excluded from income. How will you rule on leave credits in the amount of P500,000.00. Is said amount subject to tax? Explain. (1996
the protest of Tetchie Sonora? Explain. (1995 BAR) BAR) A: NO. The commutation of leave credits, more commonly known as terminal
A: I will grant the protest and cancel the assessment. The transfer of the leave pay, i.e., the cash equivalent of accumulated vacation and sick leave credits given to
property by Mr. Rodrigo to Ms. Sonora was gratuitous. The deed of sale an officer or employee who retires or separated from the service through no fault of his
own, is exempt from income tax. (BIR Ruling 238-91 dated November 8, 1991;
indicating a P 10 million consideration was simulated because Mr.
Commissioner v. CA and Efren Castaneda, GR No. 96016, October 17, 1991)
Rodrigo did not receive anything from the sale. The problem categorically
states that the transfer was made in gratitude to Ms. Sonora‘s
companionship. The transfer being gratuitous is subject to donor‘s tax. Mr. BAR: A Co., a Philippine corporation, has two divisions — manufacturing and
Rodrigo should be assessed deficiency donor‘s tax and a 50% surcharge construction. Due to the economic situation, it had to close its construction division and
imposed for fraudulently simulating a contract of sale to evade donor‘s lay-off the employees in that division. A Co. has a retirement plan approved by the BIR,
tax. (Sec. 98(B), NIRC, as amended by R.A. No. 8424 – the Tax Reform which requires a minimum of 50 years of age and 10 years of service in the same
Act of 1997) employer at the time of retirement. There are 2 groups of employees to be laid off: 1.
Employees who are at least 50 years of age and has at 10 years of service at the time of
termination of employment. 2. Employees who do not meet either the age or length of
service, A Co. plans to give the following:
5. Amount received through accident or health insurance (Compensation a. For category (A) employees – the benefits under the BIR approved plan plus an ex-
gratia payment of one month of every year of service.
for damages)
b. For category (B) employees – one month for every year of service. For both categories,
As a rule, amounts received through accident or health insurance or under the cash equivalent of unused vacation and sick leave credits. A Co. seeks your advice as
workmen‘s compensation acts, as compensation for personal injuries or to whether or not it will subject any of these payments to Withholding Tax (WT). Explain
sickness, plus the amount of any damages received, whether by suit or your advice. (1999 BAR) A: For category A employees, all the benefits received on
agreement, on account of such injuries or sickness are excluded from gross account of their separation are not subject to income tax, hence no withholding tax shall
income. be imposed. The benefits received under the BIR-approved plan upon meeting the service
requirement and age requirement are explicitly excluded from gross income. The ex-gratia
payment also qualifies as an exclusion from gross income being in the nature of benefit
6. Income exempt under tax treaty received on account of separation due to causes beyond the employees' control. (Sec.
Income of any kind, to the extent required by any treaty obligation binding 32(B)(6), NIRC) The cash equivalent of unused vacation and sick leave credits qualifies
upon the Government of the Philippines. as part of separation benefits excluded from gross income. (CIR v. Court of Appeals, GR
No. 96016, October 17, 1991)

For category B employees, all the benefits received by them will also be exempt from
income tax, hence not subject to withholding tax. These are benefits received on account
of separation due to causes beyond the employees' control, which are specifically
excluded from gross income. (Sec. 32(B)(6), NIRC)

16
8. Winnings, prizes, and awards, including those in sports DEDUCTIONS
All prizes and awards granted to athletes in local and international sports
competitions and tournaments whether held in the Philippines or abroad, AND
sanctioned by their national sports associations shall not be included in gross
income and shall be tax exempt(Sec. 32 B7d, NIRC) Deductions are items or amounts authorized by law to be subtracted from the pertinent
items of gross income to arrive at taxable income.
Prizes and awards made primarily in recognition of charitable, literary,
educational, artistic, religious, scientific, or civic achievement are NOT taxable, Deductions from income tax purposes partake of the nature of tax exemptions; hence, if
provided (1) recipient was selected without any action on his part to enter the tax exemptions are to be strictly construed, then it follows that deductions must also
contest or proceeding; and (2) recipient is not required to render substantial strictly construed(CIR v. Isabela Cultural Co., G.R. No. 172231 (2007)).
future services as a condition to receiving the prize or award.
However, if there is an express mention in the law or if the taxpayer falls within the
purview of the exemption by clear legislative intent, the rule on strict construction will
BAR: Income from jueteng (2005 BAR) A: It is taxable. The law imposes a tax not apply.
on income from any source whatever which means that it includes income
whether legal or illegal. (Sec. 32(A), NIRC)

Types of Deductions
BAR: Mr. Infante was hit by a wayward bus while on his way to work. He
survived but had to pay P 400,000.00 for his hospitalization. He was unable to There are four (4) types of deductions from gross income:
work for six months which meant that he did not receive his usual salary of P 1. Itemized deductions in Section 34(A) to (J)and (M) available to all kinds
10,000.00 a month or a total of P 60, 000.00. He sued the bus company and was of taxpayers engaged in trade or business or practice of profession in the
able to obtain a final judgment awarding him P 400,000.00 as reimbursement for Philippines;
his hospitalization, P 60,000 for the salaries he failed to receive while
2. Optional standard deduction in Section 34(L) available only to
hospitalized, P 200,000.00 as moral damages for his pain and suffering, and P
100,000.00 as exemplary damages. He was able to collect in full from the
individual taxpayers deriving business, professional, capital gains and
judgment. How much income did he realize when he collected on the judgment? passive income not subject to final tax, or other income; and
Explain. (1995 BAR) 3. Optional standard deduction available to corporations under Section
A: P 60,000.00 for salaries he failed to receive. As a general rule, compensatory 34(L) of the Tax Code (introduced by RA No. 9504)
damages, actual damages (P 400,000.00), moral damages (P 200,000.00), 4. The special deductions in Sections 37 and 38 of the NIRC, and in special
exemplary damages (P 100,000.00), attorney‘s fees, and the cost of the suit, are laws like the BOI law (E.O. 226).
excluded from gross income of the awarded party. (Sec. 32(B)(4) NIRC, as
amended by R.A. No. 8424 – the Tax Reform Act of 1997, Sec. 63 of RR No.
02- 40) However, consequential damages representing the loss of the victim‘s
earning capacity are not excluded from gross income. Such damages are merely
replacement of income which would have been subject to tax if earned. (BIR a. GENERAL DEDUCTIONS
Ruling No. 26-2018)

BAR: JR was a passenger of an airline that crashed. He survived the accident but
1. Deductions must be paid or incurred in connection with the taxpayer‘s
sustained serious physical injuries which required hospitalization for 3 months. trade, business, or profession
Following negotiations with the airline and its insurer, an agreement was reached 2. Deductions must be supported by adequate receipts or invoices (except
under the terms of which JR was paid the following amounts: P 500,000.00 for standard deduction)
his hospitalization; P 250,000.00 as moral damages; P 300,000.00 for loss of
income during the period of his treatment and recuperation. In addition, JR
received from his employer the amount of P 200,000.00 representing the cash
equivalent of his earned vacation and sick leaves. Which, if any, of the amounts b. CONCEPT OF RETURN OF CAPITAL
he received are subject to income tax? Explain. (2005 BAR)
A: The amount of P 200,000.00 that JR received from his employer is subject to Income tax is levied by law only on income; hence, the amount representing return
income tax except the money equivalent of ten (10) days unutilized vacation of capital should be deducted from proceeds from sales of assets and should not be
leave credits, which is not taxable. Amounts of vacation allowances or sick leave
subject to income tax.
credits which are paid to an employee constitutes compensation. (Sec.
2.78(A)(7), RR No. 02-98, as amended by RR No. 10-2000) The amounts that
JR received from the airline are excluded from gross income and not subject to Costs of goods purchased for resale, with proper adjustment for opening and
income tax because they are compensation for personal injuries suffered from an closing inventories, are deducted from gross sales in computing gross income (Sec.
accident as well as damages received as a result of an agreement (negotiation) on 65, Rev. Reg. 2).
account of such injuries. (Sec. 32(B)(4),NIRC)
Sale of inventory of goods by manufacturers and dealers of properties- In sales of
goods representing inventory, the amount received by the seller consists of return
of capital and gain from sale of goods or properties. That portion of the receipt
BAR: Onyoc, an amateur boxer, won in a boxing competition sponsored by the representing return of capital is not subject to income tax. Accordingly, cost of
Gold Cup Boxing Council, a sports association duly accredited by the Philippine goods manufactured and sold (in the case of manufacturers) and cost of sales (in
Boxing Association. Onyoc received the amount of P 500,000 as his prize which the case of dealers) is deducted from gross sales and is reflected above the gross
was donated by Ayala Land Corporation. The BIR tried to collect income tax on
income line in a profit and loss statement.
the amount received by Onyoc and donor‘s tax from Ayala Land Corporation,
which taxes, Onyoc and Ayala Land Corporation refuse to pay. Decide. (1996
BAR) Sale of stock in trade by a real estate dealer and dealer in securities- Real estate
A: The prize will not constitute a taxable income to Onyoc, hence the BIR is not dealers and dealers in securities are ordinarily not allowed to compute the amount
correct in imposing the income tax. R.A. No. 7549 explicitly provides that ―All representing return of capital through cost of sales. Rather they are required to
prizes and awards granted to athletes in local and International sports deduct the total cost specifically identifiable to the real property or shares of stock
tournaments and competitions held in the Philippines or abroad and sanctioned sold or exchanged.
by their respective national sports associations shall be exempt from income
tax". Neither is the BIR correct in collecting the donor‘s tax from Ayala Land Sale of services- Their entire gross receipts are treated as part of gross income.
Corporation. The law is clear when it categorically stated ―That the donor‘s of
said prizes and awards shall be exempt from the payment of the donor‘s tax.

c. REQUIREMENTS FOR DEDUCTIBLE ITEMS

Timing of Claiming Deductions

A taxpayer has the right to deduct all authorized allowances for the taxable year.
As a rule, if he does not within any year deduct certain of his expenses, losses,
interest, taxes or other charges, he cannot deduct them from the income of the next
of any succeeding year (Sec. 76, Income Tax Regulations)

17
ITEMIZED DEDUCTIONS
EXPENSE ACCOUNT:
1. EXPENSES
A.In general, expenses incurred by EE are paid by his ER are taxable, except when:
Business expenses deductible from gross income include the ordinary and
necessary expenditures directly connected with or pertaining to the taxpayer‘s i. They are duly receipted;
trade or business. The cost of goods purchased for resale, with proper adjustment ii. In the name of the ER; and
for opening and closing inventories, is deducted from gross sales in computing iii. Do not partake the nature of a personal expense •
gross income.

REQUISITES FOR DEDUCTIBILITY B. Expenses paid for by EE, but reimbursed by ER are taxable, except when ( same as
A);
ORDINARY - normal and usual in relation to the taxpayer's business and
surrounding ircumstances; need not be recurring C. Personal Expenses of EE paid for or reimbursed by ER are taxable, regardless if
they are receipted or not in the name of ER
NECESSARY - appropriate and helpful in the development of taxpayer's
business or are proper for the purpose of realizing a profit or minimizing a loss D. RATA are NOT taxable fringe benefits, but are taxable compensation income:
1. Paid or incurred during the taxable year; i. Fixed Income
2. Paid or incurred in carrying on or which are directly attributable to ii. Regularly received by EE;
the development, management, operation and/or conduct of the iii. Part of Monthly Compensation Income
trade, business or exercise of profession;
3. Substantiated by adequate proof – documented by official receipts BAR: Peter is the Vice-President for Sales of Golden Dragon Realty Conglomerate,
or adequate records, which reflect the amount of expense deducted Inc. (Golden Dragon). A group of five (5) foreign investors visited the country for
and the connection or relation of the expense to the business/ trade possible investment in the condominium units and subdivision lots of Golden Dragon.
of the taxpayer); After a tour of the properties for sale, the investors were wined and dined by Peter at
4. Legitimately paid (not a BRIBE, kickback, or otherwise contrary the posh Conrad's Hotel at the cost of P150,000.00. Afterward, the investors were
to law, morals, public policy); brought to a party in a videoke club which cost the company P200,000.00 for food and
5. If subject to withholding tax, the tax required to be withheld on drinks, and the amount of P80,000.00 as tips for business promotion officers. Expenses
the expense paid or payable is shown to have been properly at Conrad's Hotel and the videoke club were receipted and submitted to support the
withheld and remitted to the BIR on time; deduction for representation and entertainment expenses. Decide if all the
6. Amount must be reasonable. representation and entertainment expenses claimed by Golden Dragon are deductible.
Explain. (2016 BAR)
4BLUE 95 NOTE: The expenses allowable to a non- resident alien or a foreign A: Not all of the representation and entertainment expenses claimed by Golden Dragon
corporation consist of only such expenses as are incurred in carrying on any are deductible. Only those that are reasonable in amount and nature should be
business or trade conducted within the Philippines exclusively(Sec. 77 RR 2). deductible. It should be noted that the total expenses are PhP 430,000.00 for the five
(5) investors or PhP 86,000.00 each. I would allow only a deduction in such amounts
Substantiation requirement – Sec. 34(A)(1)(b), NIRC: No deduction from gross as are reasonable under the circumstances but in no case shall all deductions for
income shall be allowed unless the taxpayer shall substantiate with sufficient representation and entertainment expenses, including those above enumerated, exceed
evidence, such as official receipts or other adequate records: (1) the AMOUNT 0.50% of net sales. (Sec. 34(A)(1)(iv), NIRC of 1997; RR 10-2002; Domondon)
of the expense being deducted, and (2) the DIRECT CONNECTION or relation
of the expense being deducted to the development, management, operation
and/or conduct of the trade, business or profession of the taxpayer.

HOUSEHOLD EXPENSES
Kinds of business expenses
• For household personnel, such as salaries of house help, personnel driver of the
1. Salaries, wages and other forms ofcompensation for personal employee, or other similar personal expenses.
services actually rendered, including the grossed- up monetary
value of the fringe benefit subjected to fringe benefit tax which tax INTEREST ON LOAN at less than market rate • Market Rate is at 12%
should have been paid
2. Travelling expenses MEMBERSHIP FEE
3. Cost of materials
4. Rentals and/or other payments for use or possession of property • A. Should not be pursuant to the nature of the business of ER
• B. Should not be necessary for the position.
5. Repairs and maintenance

4BLUE 95 NOTE: Extraordinary repairs are not deductible –

they are capital expenditures EXPENSES FOR FOREIGN TRAVEL
6. Expenses under lease agreements a. Reasonable business expenses for the purpose of attending business meetings or
7. Expenses for professionals conventions are NOT taxable FBs.
8. Entertainment expenses • - Inland travel expenses must not exceed 300 USD, not including lodging cost.
9. Political campaign expenses
10. Training expenses b. Economy and business class NOT taxable. 30% of cost of First class ticket taxable.
11. Others c. There should be documentary evidence proving the travel was in connection with a
meeting or convention. Otherwise, taxable FB.
Q: Calvin Dela Pisa was a Permits and Licensing Officer (rank-and-file) of Sta. Portia Realty d. If for the family members of EE, paid by ER, taxable.
Corporation (SPRC). He invited the Regional Director of the Housing and Land Use Regulatory
Board (HLURB) to lunch at the Sulo Hotel in Quezon City to discuss the approval of SPRC's
application for a development permit in connection with its subdivision development project in HOLIDAY AND VACATION EXPENSES
Pasig City. At breakfast the following day, Calvin met a prospective client interested to enter
into a joint venture with SPRC for the construction of a residential condominium unit in Cainta, Everything is considered as fringe benefit since it is not pursuant to the purpose of the
Rizal. Calvin incurred expenses for the lunch and breakfast meetings he had with the Regional business of the employer.
Director of HLURB and the prospective client, respectively. The expenses were duly supported
by official receipts issued in his name. At month's end, he requested the reimbursement of his
expenses, and SPRC granted his request. EDUCATIONAL ASSISTANCE
(a) Can SPRC claim an allowable deduction for the expenses incurred by Calvin? Explain your
answer. A: NO. SPRC cannot claim as a deduction, the amount spent for lunch in the meeting To the EE:
with the Regional Director of HLURB. While the expense is business connected, the same is • GR: Taxable;
not allowed as deduction because it was incurred as an indirect payment to a government EXC:
official which, not only amounts to a violation of the Anti-Graft and Corrupt Practices Act, but 1.Directly connected with ER‘s trade, business or profession; AND
also constitutes bribes, kickbacks and similar payments. (Sec 34(A)(1)(c), NIRC) With respect, 2.There is a written contract to the effect that EE is obliged to remain in the
however, to the amount spent for breakfast with a prospective client, the same is deductible employ of ER for a mutually agreed period.
from gross income of SPRC. The expense complies with the requirements for deductibility,
namely: (a) the expense must be ordinary and necessary; To the Dependent of EE:
(b) it must have been paid or incurred during the taxable year; • GR: Taxable;
(c) it must have been paid or incurred in carrying on the trade or business of the taxpayer, and • EXC: Assistance provided through a competitive scheme.
(d) it must be supported by receipts, records or other pertinent papers. (CIR v. General Foods
(Phils.), Inc., G.R. No. 143672, 2003) Section 34(A)(1)(b) of the NIRC, as amended, does not
require that the substantiation be in the form of official receipts or invoices issued in the name LIFE OR HEALTH INSURANCE
of the taxpayer claiming the expense. It must only be proven that there is a ―direct connection or
relation of the expense being deducted to the development, management, operation and/or GR: Taxable;
conduct of the trade, business or profession of the taxpayer‖. • EXC:
a) Pursuant to existing law, i.e. SSS, GSIS; AND
(b) Is the reimbursement received by Calvin from SPRC subject to tax? Explain your answer. b) Cost of premiums borne by ER for the group insurance of EEs
(2017 BAR) A: NO Any amount paid as reimbursements for representation incurred by the
employee in the performance of his duties is not compensation subject to withholding, if the
following conditions are satisfied: (i) It is for ordinary and necessary representation expense
paid or incurred by the employee in the pursuit of the trade, business or profession, and (ii) The
employee is required to account/liquidate for the such expense in accordance with the specific
requirements of substantiation pursuant to Sec. 34 of the NIRC, as amended. The amounts are
actually spent by the employee for the benefit of his employer, so no income is considered to
have flowed to the employee.

18
2. INTEREST 4. TAXES

Requisites for deductibility Taxes Proper: Refers to national and local taxes

1. There is a valid and existing indebtedness. Requisites for deductibility

2. The indebtedness is that of the taxpayer 1. Paid or incurred within the taxable year;
3.The indebtedness is connected with thetaxpayer‗s trade, profession, or business. 2. Paid or incurred in connection with thetaxpayer‗s trade,
profession, or business;
3. Imposed directly on the taxpayer;
4.The interest must be legally due. 4. Not specifically excluded by law frombeing deducted from the
5.The interest must be stipulated in writing. taxpayer‗s gross income.

6.The taxpayer is LIABLE to pay interest on the indebtedness. The following taxes are deductible:
1. Import duties;
7.The indebtedness must have been paid oraccrued during the taxable year. 2. Business tax;
3. Professional/occupation tax;
8.The interest payment arrangement must NOT be between related taxpayers. 4. Privilege and excise tax;
5. Documentary Stamp Tax;
9.The interest must NOT be incurred to financepetroleum operations. 6. Motor vehicle registration fees;
7. Real property tax;
8. Electric energy consumption tax; and
10.In case of interest incurred to acquireproperty used in trade, business or exercise
9. Interest on delinquent taxes.
of profession, the same was not treated as a capital expenditure (which the taxpayer
may claim only as a deduction the periodic amortization of such expenditure). Non-deductible taxes
1. Philippine income tax, except Fringe Benefit Taxes;
2. Income tax imposed by authority of any foreign country, if
Non-deductible interest expense taxpayer avails of the Foreign Tax Credit (FTC)
Interest paid in advance by the taxpayer who reports income on cash
basis shall only be allowed as deduction in the year the indebtedness is However, when the taxpayer does NOT signify his desire to avail of the tax
paid. credit for taxes of foreign countries, the amount may be allowed as a deduction
from gross income of citizens and domestic corporations subject to the
If the indebtedness is payable in periodic amortizations, only the amount limitations set forth by law.
of interest which corresponds to the amount of the principal amortized or
Treatments of surcharges/interests/fines for delinquency
paid during the year shall be allowed as deduction in such taxable year.
The amount of deductible taxes is limited to the basic tax and shall not include
the amount for any surcharge or penalty on delinquent taxes. However, interest
Interest payments made between related taxpayers. on delinquent taxes, although not deductible as tax, can be deducted as interest
expense at its full amount.
Interest on indebtedness incurred to finance petroleum exploration. Treatment of special assessment
Special assessments and other taxes assessed against local benefits of a kind
tending to increase the value of the property assessed are non-deductible from
gross income.

Tax credit vis-à-vis deduction

Tax credit – amount allowed by law to reduce the Philippine income tax due,
subject to limitations, on account of taxes paid or accrued to a foreign country.
3. BAD DEBTS
Tax Deduction Tax Credit
Taxes are deductible from gross Taxes are deductible from the
income in computing the taxable Philippines income tax itself
Debts resulting from the worthlessness or uncollectibility, in whole or in income
part, of amounts due the taxpayer actually ascertained to be worthless and Effect: Reduces taxable income upon Effect: Reduces Philippine income
the corresponding receivable should have been written off or charged off which the tax liability is calculated tax liability
within the taxable year. Sources: Deductible taxes (e.g. Sources: Only foreign income taxes
business tax, excise tax) may be claimed as credits against
A debt is worthless when after taking reasonable steps to collect it, there is Philippine income tax.
no likelihood of recovery at any time in the future.
The following may claim tax credits:
Requisites for deductibility 1. Resident citizens
2. Domestic corporations, which include all partnerships except
1. Valid and legally demandable debt due to the taxpayer general professional partnerships
2. Debt is connected with the taxpayer's trade, business or 3. Members of general professionalpartnerships
practice of profession; 4. Beneficiaries of estates or trusts
3. Debt was not sustained in a transaction entered into between
The following may NOT claim tax credits:
related parties; 1. Non-resident citizens
4. Actually ascertained to be worthless and uncollectible as of 2. Aliens, whether resident or non-resident
the end of the taxable year (taxpayer had determined with 3. Foreign corporations, whether resident onnon-resident
reasonably degree of certainty that the claim could not be
collected despite the fact that the creditor took reasonable 4BLUE 95 NOTE: Tax credits for foreign taxes are allowed only for income
steps to collect); and derived from sources outside the Philippines. The above taxpayers are not
5. Actually charged off the books of accounts of the taxpayer as entitled to tax credit; they are taxable only on income derived from Philippine
of the end of the taxable year sources.

GR: Taxpayer must ascertain and demonstrate with reasonable certainty

the uncollectibility of debt

XPNs:
1. Banks as creditors – BSP Monetary Boardshall ascertain 5. DEPRECIATION
the worthlessness and uncollectibility of the debt and shall
approve the writing off An annual reasonable allowance to reduce the wasteful value of the tangible
2. Receivables from an insurance or surety company (as fixed assets resulting from wear and tear and normal obsolescence.
debtor) may be written off as bad debts only when such
For intangible assets, the annual allowance to reduce their useful value is called
company is declared closed due to insolvency or similar
amortization.
reason
Requisites for Deductibility
Effect Of Recovery Of Bad Debts 1. It must be reasonable.
2. It must be charged off during the year.
Tax Benefit Rule on Bad Debts 3. The asset must be used in profession,trade, or business.
4. The asset must have a limited useful life.
Bad debts claimed as deduction in the preceding year(s) but subsequently
recovered shall be included as part of the taxpayer‗s gross income in the The depreciable asset must be located in the Philippines if the taxpayer is a
year of such recovery the extent of the income tax benefit of said nonresident alien or a foreign corporation.
deduction. Also called the EQUITABLE DOCTRINE OF TAX
BENEFIT. No depreciation shall be allowed for yachts, helicopters, airplanes and/or
aircrafts, and land vehicles which exceed the threshold amount of P2,400,000,
unless the taxpayer‘s main line of business is transport operations or lease of
transportation equipment and the vehicles purchased are used in the operations.

19
6. LOSSES
10. CHARITABLE AND OTHER CONTRIBUTIONS
Requisites for deductibility
1. Loss must be that of the taxpayer (e.g., losses of the parent Requisites for deductibility
corp. cannot be deducted by its subsidiary); 1. Actually PAID or made to the ENTITIES or institutions specified
2. Actually sustained and charged off within the taxable year; by law;
3. Incurred in trade, business or profession; 2. Made within the TAXABLE year.
4. Of property connected with the trade, business, or 3. It must be EVIDENCED by adequatereceipts or records.
4. For Contributions Other than Money: Theamount shall be
profession, if the loss arises from fires, storms, shipwreck or
BASED on the acquisition cost of the property (i.e., NOT the fair
other casualties, or from robbery, theft, or embezzlement; market value at the time of the contribution).
5. Sustained in a closed and completed transaction; 5. For Contributions subject to the statutory limitation: It must NOT
6. Not compensated for by insurance or other form of EXCEED 10% (individual) or 5% (corporation) of the taxpayer‗s
indemnity; taxable income before charitable contributions
7. Not claimed as a deduction for estate tax purposes;
8. In case of casualty loss, filing of notice of loss with the BIR BAR: The Filipinas Hospital for Crippled Children is a charitable organization. X visited
within 45 days from the date of the event that gave rise to the hospital, on his birthday, as was his custom. He gave P100,000.00 to the hospital and
the casualty; and P5,000.00 to a crippled girl whom he particularly pitied. A crippled son of X is in the
9. The taxpayer must prove the elements of the loss claimed, hospital as one of its patients. X wants to exclude both the P100,000.00 and the P5,000.00
such as the actual nature and occurrence of the event and from his gross income. Discuss. (1993 BAR)
amount of the loss. Applying the above provisions of law ON THE REQUISITIES to the case at bar, it is
clear therefore that only the P 100,000.00 contribution of X to Filipinas Hospital for
Crippled Children qualified as a deductible contribution. The NIRC expressly provides
In case a non-depreciable vehicle is sold at a loss, the loss incurred from that the same must be actually paid to a charitable organization to be deductible. Note that
the sale of non- depreciable vehicle is not allowed as a deduction(RR No. the law accorded no privilege to similar contributions extended to private individuals.
2-2013) Hence, the PhP 5,000.00 contribution to the crippled girl cannot be claimed as a
deduction.
NO loss is recognized in the following:
1. Merger, consolidation, or control securities(where no gains a. The P 100,000.00 donation may properly be deducted from X‘s gross income, but not
are recognized either); the P 5, 000.00 donated to the crippled girl, as charitable and other contributions that may
2. Exchanges not solely in kind; be deducted from taxable income do not contemplate those given to individuals. While it
3. Related taxpayers- Interest expense incurred to acquire may be that X‘s son is a patient in the hospital, it cannot be said that part of its net income
property for use in trade/business/profession; inures to the benefit of X as to be disallowed as a deduction from taxable income.
4. Wash sales; b. Assuming X is a self-employed individual, he may not deduct the donations made
because under Section 29 of the NIRC as amended by R.A. No. 7496 better known as
5. Illegal transactions.
SelfEmployed and Professionals Engaged in the Practice of their Profession (SNITS),
only contribution to the government or to an accredited relief organization for the
Other types of losses rehabilitation of calamity-stricken areas declared by the President may be deducted for
1. Capital losses income tax purposes. Clearly, the donees do not qualify as relief organizations.
2. Incurred in the sale or exchange of capital assets (allowable c. Assuming X is receiving purely compensation income, he can only deduct from gross
only to the extent of capital gains, except for banks and trust compensation income premium on Health and/or Hospitalization Insurance. (Sec. 34(M),
companies under conditions in Sec. 39 of NIRC where loss NIRC) Personal exemption, additional personal exemption, and special additional
from such sale is not subject to the foregoing limitation) personal exemption have been repealed by Sec. 12 of R.A. No. 10963 – TRAIN Law
3. Resulting from securities becoming worthless and which are
capital assets (considered loss from sale or exchange) on last Kinds of Contributions:
day of the taxable year 1. Contributions deductible in full;
4. Losses from short sales of property; 2. Contributions subject to the statutory limit.
5. Losses due to failure to exercise privilegesor options to buy
Contributions Deductible in Full:
or sell property. 1. Donations to the Government of the Philippines, or to any of its
agencies, or political subdivisions, including fully owned
government corporations
BAR: A is a travelling salesman working full time for Nu Skin Products. He receives a 2. Exclusively to finance, provide for, or to be used in undertaking
monthly salary plus 3% commission on his sales in a Southern province where he is priority activities in
based. He regularly uses his own car to maximize his visits even to far flung areas. One a. Education
fine day a group of militants seized his car. He was notified the following day by the b. Health
police that the marines and the militants had a bloody encounter and his car was c. Youth and sports development
completely destroyed after a grenade hit it. A wants to file a claim for casualty loss. d. Human settlements
Explain the legal basis of your tax advice. (2010 BAR) e. Science and culture, and
A: A is not entitled to claim a casualty loss because all of his income partake the nature f. Economic development
in accordance with a National Priority Plan determined by NEDA
of compensation income. Taxpayers earning compensation income arising from personal
(otherwise, subject to statutory limit)
services under an employer-employee relationship are not allowed to claim deduction
except that allowed under Section 34(M) referring only to the PhP 2,400 health and/or 3. Donations to Certain Foreign Institutions or International
hospitalization insurance premium; perforce, the claim of casualty loss has no legal Organizations which are fully deductible in compliance with
basis. (Sec. 34(M), NIRC) agreements, treaties or commitments entered into by the
Government of the Philippines and the foreign institutions or
international organizations or in pursuance of special laws
4. Donations to Accredited Non-government Organizations subject
to conditions set forth in RR No. 13-98 – NGO means a non-stock
non-profit domestic corporation or organization:
Organized and operated exclusively for:
7. DEPLETION OF OIL AND GAS WELLS AND MINES a. scientific,
b. research,
c. educational,
8. RESEARCH AND DEVELOPMENT d. character-building and youth andsports
development,
9. PENSION TRUSTS e. health,
f. social welfare,
Contributions to pension trusts g. cultural or
Contribution to a pension trust may be claimed as deduction as follows: h. charitable purposes, or
1. Amount contributed for the present/normal service cost – i. a combination thereof,
100% deductible
2. Amount contributed for the past service cost – 1/10 of the No part of the net income of which inures to the benefit of any private
amount contributed is deductible in year the contribution is individual.
made, the remaining balance will be amortized equally over Administrative expense, on an annual basis, must not exceed 30% of total
expenses for the taxable year
9 consecutive years

GR: An employer establishing or maintaining a pension trust to provide BAR: Years ago, Krisanto bought a parcel of land in Muntinlupa for only PhP65,000. He
for the payment of reasonable pensions to his employees shall be allowed donated the land to his son, Kornelio, in 1980 when the property had a fair market value of
as a deduction, a reasonable amount transferred or paid into such trust in PhP75,000, and paid the corresponding donor's tax. Kornelio, in turn, sold the property in 2000
excess of the contributions to such trust made during the taxable year. to Katrina for P 6.5 million and paid the capital gains tax, documentary stamp tax, local transfer
tax, and other fees and charges. Katrina, in turn, donated the land to Klaret School last August
Requisites for deductibility of payments to pension trusts 30, 2017 to be used as the site for additional classrooms. No donor's tax was paid, because
1. There must be a pension or retirement plan established to Katrina claimed that the donation was exempt from taxation. At the time of the donation to
provide for the payment of reasonable pensions to Klaret School, the land had a fair market value of P 65 million. (b) How much in deduction
employees; from gross income may Katrina claim on account of the said donation? (2018 BAR)
2. The pension plan is reasonable and actuarially sound; A: If Klaret School is an accredited ‗nongovernment organization, having been established as a
non-profit domestic corporation, organized and operated exclusively for educational purposes,
3. It must be funded by the employer;
the donation to it as a qualified donee-institution is deductible in full. (Sec. 34(H)(2)(c), NIRC)
4. The amount contributed must no longer be subject to the The deduction from gross income shall be the acquisition cost of said property by the donor
employer‘s control ordisposition; and which is P 6.5 million. (Sec. 34(H)(3), NIRC)
5. The payment has not theretofore beenallowed before as a
deduction.

20
OPTIONAL STANDARD DEDUCTIONS ITEMS NOT DEDUCTIBLE
GR: In determining deductions, one of the general rules is that deductions must be paid or
1. Individuals, except non-resident aliens incurred in connection with the taxpayer‟s trade, business, or profession.

May be taken by an individual in lieu of itemized deductions except those Capital expenditures (e.g. acquisition cost of a building) are also NOT
deductible, because these are not expenses, but form part of assets.
earning purely compensation income.

If an individual opted to use OSD, he is no longer allowed to deduct cost XPNs: In computing taxable net income, NO deduction shall be allowed with respect to:
of sales or cost of services.
1. Personal, living, or family expenses
Amount:40% of gross sales or gross receipts(under RA 9504, effective
July 6, 2008) BAR: Mr. E and Ms. F are both employees of AAA Corp. They got married on
February 14, 2011. On December 29, 2011, the couple gave birth to triplets. On
Requisites: June 25, 2013, they had twins. What were the personal exemptions/deductions
which Mr. E and Ms. F could claim in the following taxable years? (2015 BAR)
1. Taxpayer is a citizen or resident alien; (a) For 2010 A: For 2010, Mr. E and Ms. F are each entitled to personal
2. Taxpayer‘s income is not entirely fromcompensation; exemptions of PhP 50,000.00. (Sec. 35(A), NIRC) (b) For 2011 A: For 2011,
3. Taxpayer signifies in his return hisintention to elect this Mr. E and Ms. F are each entitled to basic personal exemption of PhP 50,000.00.
In addition to his basic personal) exemption, Mr. E could claim additional
deduction; otherwise he is considered as having availed of
personal exemptions for three qualified dependent children in the amount of PhP
the itemized deductions; 25, 000.00 for each child. (Sec. 35(B), NIRC) (c) For 2013 A: For 2013, Mr. E
4. Election is irrevocable for the year in which made; however, and Ms. F are each entitled basic personal exemptions of P50,000.00. Mr E could
he can change to itemized deductions in succeeding years. claim additional personal exemptions for four qualified dependent children in the
amount of P25,000.00 for each child. (Sec 35(B), NIRC)

BAR: In 2012, Dr. K decided to return to his hometown to start his own 4BLUE 95 NOTE: Allowance for personal exemption for individual taxpayer
practice. At the end of 2012, Dr. K found that he earned gross professional was repealed by Sec. 12 of R.A. No. 10963 – TRAIN Law.
income in the amount of P1,000,000.00. While he incurred expenses
amounting to P 560,000.00 constituting mostly of his office space rent, 2. Any amount paid out for new buildings or for permanent improvements(capital
utilities, and miscellaneous expenses related to his medical practice. expenditures), or betterments made to increase the value of any property or estate
However, to Dr. K‘s dismay, only P320,000.00 of his expenses were duly 3. Any amount expended in restoring property (major repairs) or in making good
the exhaustion thereof for which an allowance (for depreciation or depletion) is
covered by receipts. What are the options available for Dr. K so he could
or has been made
maximize the deductions from his gross income? (2015 BAR)
A: In order to maximize his deductions, Dr. K may avail of the optional 4. Premiums paid on any life insurance policy covering the life of any officer,
standard deduction (OSD) which is an amount not exceeding forty percent employee, or any person financially interested in the trade or business carried on
(40%) of his gross sales or gross receipts. The OSD can be claimed by the taxpayer, individual or corporate, when the taxpayer is directly or
without being required to present proof or evidence of expenses paid or indirectly a beneficiary under such policy
incurred by him. (Sec. 34(L), NIRC; RR No. 16-08, as amended)
BAR: OXY is the president and chief executive officer of ADD Computers Inc.
When OXY was asked to join the government service as director of a bureau
2. Corporations, except non-resident foreign corporations under the Department of Trade and Industry, he took a leave of absence from
ADD. Believing that its business outlook, goodwill and opportunities improved
with OXY in the government, ADD proposed to obtain a policy of insurance on
his life. On ethical grounds, OXY objected to the insurance purchase but ADD
The option to elect Optional Standard Deduction granted is now granted to
purchased the policy anyway. Its annual premium amounted to P100,000. Is said
corporations by virtue of RA 9504. The OSD is 40% of its gross income. premium deductible by ADD Computers, Inc.? Reason. (2004 BAR) A: NO. The
premium is not deductible because it is not an ordinary business expense. The
Corporations availing of OSD are still required to submit their financial term "ordinary‖ is used in the income tax law in its common significance and it
statements when they file their annual ITR and to keep such records has the connotation of being normal, usual or customary. (Deputy v. Du Pont,
pertaining to its gross income. 308 US 48) Paying premiums for the insurance of a person not connected to the
company is not normal, usual or customary. Another reason for its non-
deductibility is the fact that it can be considered as an illegal compensation made
3. Partnerships to a government employee. This is so because if the insured, his estate or heirs
were made as the beneficiary (because of the requirement of insurable interest),
the payment of premium will constitute bribes which are not allowed as
For purposes of taxation, the Code considers general co-partnerships as deduction from gross income. (Sec. 34(A)(1)(c), NIRC) On the other hand, if the
company was made the beneficiary, whether directly or indirectly, the premium
corporations. Hence, rules on OSD for corporations are applicable to
is not allowed as a deduction from gross income. (Sec. 36(A)(4), NIRC)
general co-partnerships.
BAR: Noel Santos is a very bright computer science graduate. He was hired by
Hewlett Packard. To entice him to accept the offer of employment, he was
offered the arrangement that part of his compensation would be an insurance
policy with a face value of P20 million. The parents of Noel are made the
beneficiaries of the insurance policy. xxx (b) Can the company deduct from its
gross income the amount of the premium? Reason briefly. (2007 BAR) A: YES.
The premiums paid are ordinary and necessary business expenses of the
company. They are allowed as a deduction from gross income so long as the
employer is not a direct or indirect beneficiary under the policy of insurance.
(Sec. 36(A)(4), NIRC) Since the parents of the employee were made the
beneficiaries, the prohibition for their deduction does not exist.
Relevant points regarding related taxpayers
1. Payment of interest is not deductible.
2. Bad debts are not deductible. 5. Interest expense and bad debts between related parties(Sec. 36(B), NIRC))
3. Losses from sales or exchanges ofproperty are not deductible. 6. Losses from sales or exchanges of property between related taxpayers.
7. Non-deductible interest – should the taxpayer elect to deduct interest payments
against its gross income, he cannot at the same time capitalize such interest and
claim depreciation on the undepreciated cost which includes the interest.

Related Parties (Sec. 34(B), NIRC) 8. Non–deductible taxes

1. Between members of a family (which shall include only his brothers and sisters, 9. Non-deductible losses
spouse, ancestors and lineal descendants)
2. Between an individual and a corporation more than 50% in value of the 10. Losses on Wash Sales (except if by dealerin securities in ordinary course of
outstanding stock of which is owned, directly or indirectly, by or for such exempt corporations) These are:
individual – except in the case of distributions in liquidation a. Proprietary Educational Institutions and hospitals
3. Between two corporations more than 50% in value of the outstanding stock of b. Government owned and controlled corporations
each of which is owned, directly or indirectly by or for the same individual
4. Between the grantor and the fiduciary of a trust 11. Others- Bribes kickbacks and other payments.
5. Between the fiduciary of a trust and the fiduciary of another trust if the same
person is a grantor with respect to each trust BAR: Freezy Corporation, a domestic corporation engaged in the manufacture
6. Between the fiduciary of a trust and a beneficiary of such trust. and sale of ice cream, made payments to an officer of Frosty Corporation, a
competitor in the ice cream business, in exchange for said officer‘s revelation of
Frosty Corporation‘s trade secrets. May Freezy Corporation claim the payment to
the officer as deduction from its gross income? Explain. (2014 BAR)
A: NO. The payments made in exchange for the revelation of a competitor‘s
trade secrets is considered as an expense which is against law, morals, good
customs or public policy, which is not deductible. (3M Philippines, Inc. v. CIR,
GR No. 82833, 1988) Also, the law will not allow the deduction of bribes,
kickbacks and other similar payments. Applying the principle of ejusdem
generis, payment made by Freezy Corporation would fall under ―other similar
payments‖ which are not allowed as deduction from gross income. (Sec.
34(A)(1)(c).NIRC)

21
FILING OF RETURNS AND PAYMENT 2.Minimum wage earners

Minimum wage earners (MWE) shall refer to a worker in the private sector paid the
statutory minimum wage, or to an employee in the public sector with compensation
Tax Return income of not more than the statutory minimum wage in the non-agricultural sector
Tax return refers to a formal report prepared by the taxpayer or his agent in a prescribed where he/she is assigned. (Sec. 22(HH))
form showing an enumeration of taxable amounts and description of taxable
transactions, allowable deductions, amount of tax and tax payable to the government. Definition of statutory minimum wage (SMW)
Refers to the rate fixed by the Regional Tripartite Wage and Productivity Board
Examples of tax returns are: (RTWPB), as defined by the Bureau of Labor and Employment Statistics (BLES) of
1. BIR Form Nos. 1700 and 1701 – Annual Income Tax Returns for the Department of Labor and Employment (DOLE); the RTWPB of each region shall
Individual determine the wage rates in the different regions based on established criteria and shall
2. BIR Form No. 1702 – Annual Income Tax Return for Corporations and be the basis of exemption from income tax for this purpose.
Partnerships
Compensation income of MWEs shall be exempt from income tax and consequently
3. BIR Form No. 1800 – Donor‘s Tax Return
from withholding tax on compensation if they work:
4. BIR Form No. 1801 – Estate Tax Return a. In the private sector and being paid the SMW; or
b. In the public sector and being paid compensation of not more than the SMW in
Information Return the non-agricultural sector
Any individualnot required to file an income tax return may nevertheless be required to
file an information return pursuant to rules and regulations prescribed by the Secretary Other income of MWEs which are tax-exempt (Sec. 24(2)(A)):
of Finance, upon recommendation of the Commissioner(Sec. 51(A)(3), NIRC). a. Holiday pay
b. Overtime pay
Every withholding agent required to deduct and withhold taxes under Section 57 shall c. Night shift differential pay and
submit to the Commissioner an annual information return containing the list of payees d. Hazard pay
and income payments, amount of taxes withheld from each payee and such other
pertinent information as may be required by the Commissioner (Sec. 58 (C), NIRC). Additional compensation such as commissions, honoraria, fringe benefits, benefits in
excess of the allowable statutory amount of ₱90,000.00, taxable allowances, and other
taxable income given to an MWE by the same employer other than those which are
Every employer required to deduct and withhold the taxes in respect of the wages of his expressly exempt from income tax shall be subject to withholding tax (Rev. Regs. 02-
employees shall, on or before January 31st of the succeeding year, submit to the 98, Sec. 2.7.81 as amended by R.A. No. 9504)
Commissioner an annual information return containing a list of employees, the total
amount of compensation income of each employee, the total amount of taxes withheld 4BLUE 95 Note: MWEs do not lose their tax-exempt status even though they have
therefrom during the year, accompanied by copies of the statement referred to in the received other benefits in excess of the statutory limit of P30,000. (Soriano v. Secretary
preceding paragraph, and such other information as may be deemed necessary (Sec. 83 of Finance, G.R. No. 184450, 2017)
(B), NIRC).
MWEs receiving other income from other sources in addition to compensation income,
such as income from other concurrent employers, from the conduct of trade, business,
or practice of profession, except income subject to final tax, are subject to income tax
a. INDIVIDUAL RETURN only to the extent of income other than SMW, holiday pay, overtime pay, night shift
differential pay, and hazard pay earned during the taxable year (Rev. Regs. 02-98, Sec.
2. 7.8 as amended by R.A. No. 9504). Basis of computation of minimum wage rates
(Rev. Regs. 02-98, Sec. 2.78.5 as amended by Rev. Regs. 10- 08, Sec. 2)
WHO ARE REQUIRED TO FILE; EXCEPTIONS
The basis of the computation of the minimum wage rates prescribed by law shall be the
GR: The following are required to file income tax return: normal working time of eight (8) hours a day.
1. Resident citizen
2. Non-resident citizen, on income fromsources within the Philippines The computation of wages shall be in accordance with the Collective Bargaining
3. Resident alien, on income from sources within the Philippines Agreement (CBA), if any, or the provisions of the Labor Code as implemented. Unless
4. Non-resident alien engaged in trade or business or in the exercise of otherwise amended or repealed by subsequent pertinent laws, rules and regulations, the
profession in the Philippines, on income from sources within the holiday pay, overtime pay, night shift differential and hazard pay shall be understood
Philippines to be computed based on such agreement or labor law provisions.
XPNs: The following shall not be required to file income tax return:
In the determination of the minimum wage on a monthly basis, the withholding agent
1. Individuals whose gross income does NOT exceed P250,000except
shall be guided by the prevailing minimum wage as reflected in the latest Matrix of
citizen and alien individuals engaged in business or practice of profession Wage Order and its own policy on whether employees are
within the Philippines who shall file income tax returns regardless of the (a) not considered paid on Saturdays and Sundays or rest days,
amount of gross income. (b) not considered paid on Sundays or rest days,
2. Minimum wage earner (as defined in Sec. 22 (HH)) (c) considered paid on rest days, special days and regular holidays, or
3. Senior Citizen (d) required to work everyday including Sundays or rest days, special days and regular
4. Individuals who are exempt from income tax pursuant to the provisions holidays.
of the Tax Code and other laws.
The resulting number of days in the above enumerated categories are referred to as the
factor or number of working/paid days in a year.
INDIVIDUAL TAXPAYERS EXEMPT FROM INCOME TAX

1. Individuals with respect to pure compensation income from sources within the
Philippines, the income tax on which has been withheld; except when such 3. Exemptions granted under international agreement
compensation has been derived from more than one employer.
Employee benefits of non-Filipino nationals and/or nonpermanent residents of the
Individuals whose sole income has been subjected to final withholding tax Philippines from foreign governments, embassies or diplomatic missions, and
internationals organizations in the Philippines are exempt from income tax.
(pursuant to Sec. 57 (A)).
Filipino employees of foreign governments, international missions and organizations
are taxable as rule except only to employee of the following organizations:
2. Senior citizens a. United Nations
b. World Health Organization
1. Any resident of the Philippines; and c. Food and Agriculture Organization
2. At least 60 years old. d. United Nations Development Organization
e. Specialized Agencies of the United Nations
General Rule: Qualified Senior Citizens (SC) deriving income during the f. International Organization for Migration
taxable year, whether from compensation or otherwise, are required to file their g. International Seabed Authority (Banggawan)
income tax returns and pay the tax as they file the return.

Exceptions:
Special Provisions
• If income is in the nature of compensation income and the SC qualifies as a
MWE, he shall be exempt from income tax on said compensation income, Married individuals (whether citizens, resident, or nonresident aliens) who do not derive
subject to the rules of RA 9504 and RR No. 10-08. income purely from compensation, shall file only one consolidated return to cover the income
of both spouses for the taxable year, but where it is impracticable for the spouses to file one
• If the aggregate amount of gross income earned by the SC during the taxable
return, each spouse may file a separate return of income but the returns so filed shall be
year does not exceed the amount of basic and additional exemptions, he shall be consolidated by the BIR for verification (Sec. 51 (D), NIRC).
exempt from payment of income tax and filing of an ITR.
The income of unmarried minors is a tax liability of the minor but where such income is
4BLUE 95 Note: The income tax exemptions granted, as stated above, to SCs derived from property received from a living parent, the income shall be included in the return
does not extend to income subject to final tax (e.g., interest income from bank of the parent except (a) when the donor‘s tax hasbeen paid on such property, or (b) when the
deposits, dividends, capital gains tax) (Expanded Senior Citizens Act of 2003; transfer of such property is exempt from the donor‘s tax (Sec. 51 (E), NIRC).
Rev. Regs. 07-10) If the taxpayer is unable to make his return, such as when he suffers from disability, the return
may be made by his duly authorized agent or representative or by the guardian or other person
Compliance Requirements for Income Tax Exemption: (i) Must first be charged with the care of the taxpayer or his property; the principal and his representative or
qualified as such by the CIR or the RDO by submitting a certified true copy of guardian assuming responsibility for penalties for erroneous, false or fraudulent returns (Sec. 51
his OSCA ID; and (ii) Must file a sworn statement on or before January 31 of (F), NIRC).
every year that his annual taxable income does not exceed the poverty level.

22
SUBSTITUTED FILING

Applicable to individual taxpayers: b. CORPORATE RETURNS

1. receiving purely compensation income, regardless of amount
2. from only one employer in the Philippines for the calendar year, and
3. the income tax of which has been withheld correctly by the employer i. QUARTERLY INCOME TAX / FINAL ADJUSTMENT RETURN

The certificate of withholding filed by their respective employers, duly stamped All corporations subject to income tax shall render quarterly income tax returns and a
‗received‘ by the BIR, shall be tantamount to the substituted filing of income tax returns final or adjustment return, except foreign corporations not engaged in trade or
by the employee (Sec. 51-A, NIRC). business in the Philippines.

The return shall be filed by the President, Vice- President or other principal officer, and
shall be sworn to by such officer and by the treasurer or assistant treasurer.

iii. WHEN ARE WHERE TO FILE

WHEN ARE WHERE TO FILE
DOMESTIC CORPORATIONS and RESIDENT FOREIGN CORPORATIONS shall
Income tax return of an individual who is not on a substituted basis shall be filed on or file quarterly corporate income tax returnswithin 60 daysafter the end of the calendar
before April 15 of each year covering income of the preceding taxable year or fiscal quarter used, and annual corporate income tax returnon or before the 15th
day of the fourth monthfollowing the close of the calendar year or fiscal year, as the
Individuals subject to capital gains tax(Sec. 51 (C)(2), NIRC): case may be (Sec. 74).
1. Sale of shares not traded through a local stock exchange – file a return
within 30 days from the transaction, and a final consolidated return on or The filing of the tax returns by a corporation using the calendar year:
before April 15 of each year covering all stock transactions of the Period Due Date for Filing Return
preceding taxable year Q1 Return May 31 of the same year
2. Sale of real property – file a return within 30 days from each sale Q2 Return August 31 of the same year
Q3 Return November 30 of the same year
Individuals deriving self-employment income(as sole source of income or mixed) – Annual Return April 15 of the following year
must file quarterly return of summary declaration of gross income and deductions, and
a final or adjustment (Sec. 74 (A), NIRC). Where to File
Except in cases where the CIR otherwise permits, the return shall be filed with an
authorized agent bank,Revenue District Officer, Collection Agent or duly
Period Due Date for Filing authorized Treasurer of the city or municipality having jurisdiction over the place
Q1 Return May 15 of the same year where the corporation‘s principal office is located and where its books of accounts and
Q2 Return August 15 of the same year other data are kept; otherwise, the returns shall be filed and the tax paid thereon with the
Q3 Return November 15 of the same year Office of the Commissioner of Internal Revenue(Sec. 77 (A), NIRC).
Annual Return April 15 of the following year
Payment of Income Tax
Self-employment income consists of earnings derived by the individual from the GR: The total amount of tax imposed by this Title (Tax on Income) shall be paid by the
practice of profession or conduct of trade or business, as a sole proprietor or as a person subject thereto at the time the return is filed.
member in a general professional partnership (Sec. 74 (A), NIRC)
XPN: When the tax due is in excess of P2,000, the taxpayer other than a corporation
Filing of these returns shall be in lieu of filing of a declaration of estimated income may elect to pay the tax in 2 equal installments: the first installment paid at the time the
under Sec. 74, primarily for the reason that the procedure prescribed in Sec. 74 may not return is filed and the second installment, on or before October 15 following the close of
reasonably approximate the correct amount of tax to be paid(DE LEON citing RR No. 2- the calendar year. (Sec. 56 (A)(2), NIRC)
93)
iv. RETURN OF CORPORTIONS CONTEMPLATING DISSOLUTION OR
Where to File REORGANIZATION
Within 30 days after the adoption of the plan for dissolution or reorganization (including
Except in cases where the CIR otherwise permits, the return shall be filed with an corporations notified of possible involuntary dissolution by the SEC), render a correct
authorized agent bank, Revenue District Officer, Collection Agent or duly return to the CIR, verified under oath, setting forth the terms of such plan and such other
authorized Treasurer of the city or municipality in which such person has his information required by rules and regulations. Prior to the issuance by the SEC of the
legal residence or principal place of business in the Philippines, or if there be no Certificate of Dissolution or Reorganization, the corporation shall secure a certificate of
legal residence or place of business in the Philippines, with the Office of the tax clearance from the BIR which shall be submitted to the SEC(Sec. 52 (C), NIRC).
Commissioner (Sec. 51 (B), NIRC).
c. RETURN ON CAPITAL GAINS REALIZED FROM SALE OF SHARES OF
STOCK AND REAL ESTATE
Return on Capital Gains Realized from Sale of Shares of Stock not Traded in the Local
Stock Exchange – file a return within 30 days from the transaction, and a final
consolidated return on or before the 15th day of the fourth month following the close
of the taxable year(Sec. 52 (D), NIRC).

23
WITHHOLDING TAX

EXEMPTION FROM WITHHOLDING TAX:

a. CONCEPT

Withholding tax is a method of collecting income tax in advance from the taxable
1. Retirement benefits received under RA No. 7641 and those received by officials
income of the recipient of income.
and employees of private firms, whether individual or corporate, under a
reasonable private benefit plan maintained by the employer subject to the
In the operation of the withholding tax system, the payee is the taxpayer, the person on
requirements provided by the Code
whom the tax is imposed, while the payor, a separate entity, acts no more than an agent
of the government for the collection of the tax in order to ensure its payment.
2. Any amount received by an official or employee or by his heirs from the
employer due to death, sickness or other physical disability or for any cause
The duty to withhold is different from the duty to pay income tax. The revenue officers
beyond the control of the said official or employee, such as retrenchment,
generally disallow the expenses claimed as deduction from gross income, if no
redundancy, or cessation of business
withholding of tax as required by law or the regulations was withheld and remitted to the
BIR within the prescribed dates.
3. Social security benefits, retirement gratuities, pensions and other similar benefits
received by residents or nonresident citizens of the Philippines or aliens who come
In addition, the withholding tax that should have been withheld and remitted to the BIR
as well as the penalties for non-, late or erroneous payment of the withholding tax such to reside permanently in the Philippines from foreign government agencies and
as surcharges and deficiency interest are assessed by the BIR. other institutions private or public

4. Payments of benefits due or to become due to any person residing in the

b. FINAL WITHHOLDING TAX
Philippines under the law of the United States administered by the United States
Veterans Administration
The amount of income tax withheld by the withholding agent is constituted as a full and
final payment of the income tax due from the payee on the said income.
5. Payments of benefits made under the Social Security System Act of 1954 as
amended
The liability for payment of the tax rests primarily on the payor as withholding agent.
Thus, in case of his failure to withhold the tax or in case of under withholding, the
6. Benefits received from the GSIS Act of 1937, as amended, and the retirement
deficiency tax shall be collected from the payor/withholding agent. The payee is NOT
gratuity received by government officials and employees
required to file an income tax return for the particular income.
7. Thirteenth (13th) month pay and other benefits received by officials and
c. CREDITABLE WITHHOLDING TAX
employees of public and private entities not exceeding P82,000.00
Under the creditable withholding tax system, taxes withheld on certain income payments
8. GSIS, SSS, Medicare and Pag-Ibig contributions, and union dues of individual
are intended to equal or at least approximate the tax due of the payee on said income.
employees
The income recipient is still required to file an income tax return, to report the income
9. Remuneration paid for agricultural labor
and/or pay the difference between the tax withheld and the tax due on the income. Taxes
withheld on income payments covered by the expanded withholding tax and
10. Remuneration for domestic services
compensation income are creditable in nature.
11. Remuneration for casual labor not in the course of an employer's trade or
i. EXPANDED WITHHOLDING TAX
business
Withholding Tax at Source(Sec 57, NIRC)
12. Remuneration not more than the statutory minimum wage and the holiday pay,
Withholding of final tax of certain income – Subject to rules and regulations the
overtime pay, night shift differential pay and hazard pay received by Minimum
Secretary of Finance may promulgate, upon the recommendation of the CIR, the
Wage Earners
tax imposed or prescribed by the NIRC on certain specified items of income shall
be withheld by payor- corporation and/or person.
13. Compensation for services by a citizen or resident of the Philippines for a
foreign government or an international organization
N.B. Sec. 57 contains an extensive list of taxes. These items of income include
14. Actual, moral, exemplary and nominal damages received by an employee or his
taxes on certain passive incomes (interest, dividends), capital gains tax (shares
heirs pursuant to a final judgment or compromise agreement arising out of or
not traded, real property), branch profit remittance tax, and certain payments to
related to an employer-employee relationship
nonresident aliens /foreign corporations.
15. The proceeds of life insurance policies paid to the heirs or beneficiaries upon
Withholding of creditable tax at source – The Secretary of Finance may, upon
the death of the insured, whether in a single sum or otherwise, provided however,
the recommendation of the CIR, require the withholding of a tax on the items of
that interest payments agreed under the policy for the amounts which are held by
income payable to natural or juridical persons, residing in the Philippines, by
the insured under such an agreement shall be included in the gross income
payor- corporation/persons as provided for by law, at the rate of not less than 1%
but not more than 32%, which shall be credited against the income tax liability of
the taxpayer for the taxable year. Provided, That, beginning January 1, 2019, the 16. The amount received by the insured, as a return of premium or premiums paid
by him under life insurance, endowment, or annuity contracts either during the
rate of withholding shall not be less than one percent (1%) but not more than
term or at the maturity of the term mentioned in the contract or upon surrender of
fifteen percent (15%) of the income payment. (Sec. 57 (B), NIRC)
the contract
Withholding of VAT(Sec 114 (C), NIRC)
17. Amounts received through Accident or Health Insurance or under Workmen's
The government (political subdivisions, instrumentalities, agencies, GOCCs) shall
Compensation Acts, as compensation for personal injuries or sickness, plus the
deduct and withhold final VAT of 5% of gross payment on purchase of goods and
amount of any damages received whether by suit or agreement on account of such
services subject to VAT. If the payment is for lease or use of properties to a
injuries or sickness
nonresident owner, withholding tax shall be 12%.
18. Income of any kind to the extent required by any treaty obligation binding upon
4 BLUE 95 NOTE: Beginning January 1, 2021, the VAT withholding system shall
the Government of the Philippines •
shift from final to a creditable system.
19. Income of any kind to the extent required by any treaty obligation binding upon
ii. WITHHOLDING TAX ON COMPENSATION
the Government of the Philippines
Except in the case of minimum wage earner, every employer making payment of
wages shall deduct and withhold upon such wages a tax determined in accordance
20. Fringe and De minimis Benefits
with the rules and regulations to be prescribed by the Secretary of Finance, upon
recommendation of the CIR.
21. Other income received by employees which are exempt under special laws
(RATA granted to public officers and employees under the General Appropriations
Act and Personnel Economic Relief Allowance granted to government personnel)
d. DUTIES OF A WITHHOLDING AGENT

The withholding tax that should have been withheld and remitted to the BIR as well as
the penalties for non-, late or erroneous payment of the withholding tax such as
surcharges and deficiency interest are assessed by the BIR

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